UBS Analysis: Public Tech Investment Trust at an All-Time High, Emphasizing Electronics in Second Quarter

TL;DR
· According to UBS, the public mutual funds' large-cap tech holdings in the second quarter increased to 57.3%, with an over-allocation of 18.5%, both hitting historical highs.
· The technology sector saw a quarterly increase of 20.2 percentage points, and holdings in the Sci-Tech Innovation Board and the Growth Enterprise Market also rose to record levels.
· Hard technology benefited from earnings upgrades and policy support, but a high allocation may amplify external volatility and deleveraging pressure.

According to UBS's latest China stock strategy report, in the second quarter of 2026, public mutual funds' allocation to A-share hard technology reached a historical high, with electronics, telecommunications, as well as the Sci-Tech Innovation Board and the Growth Enterprise Market being the most concentrated areas of increase.

The most significant figure is that the large-cap tech sector, including electronics, telecommunications, computers, and defense, accounted for 57.3% of public fund holdings, with an over-allocation of 18.5%, both reaching historical highs. As per UBS's calculations, the electronics sector saw a 20.2 percentage point increase in quarterly holdings, making it the strongest area of increase in the second quarter; holdings in telecommunications and machinery increased by 4.4 and 0.8 percentage points, respectively.

Foreign capital inflows are reinforcing this trend. According to public reports, CMB Securities estimates that net northbound fund inflows in the second quarter were around 223 billion yuan, while Guosen Securities estimates it at around 219.3 billion yuan, both indicating a shift from net outflows in the first quarter to significant inflows. According to UBS's industry classification, the main directions of inflows were in the industrial and IT sectors.

Electronics Saw a 20.2 Percentage Point Increase in Holdings in a Single Quarter, Hard Technology Holdings Exceeded Half

In the second quarter, the changes in public mutual fund allocations did not lift all industries together but saw funds concentrated in electronics and telecommunications.

According to UBS, holdings in the electronics sector increased by 20.2 percentage points from the first quarter, telecommunications increased by 4.4 percentage points, and machinery increased by 0.8 percentage points. Holdings in sectors such as electrical equipment, food and beverage, non-ferrous metals, chemicals, defense, and banking decreased or continued to fall. Traditional consumer and some pro-cyclical sectors are no longer the main focus of public fund increases.

In the second quarter, public mutual funds increased their holdings in the electronics sector by 20.2 percentage points and in the telecommunications sector by 4.4 percentage points.

The large-cap tech sector's holdings at 57.3% with an over-allocation of 18.5% have not only reached a historical high but have also significantly exceeded the peak allocation of the consumer sector during its hottest period. For the average investor, it is clear in the second quarter that A-share institutional fund preference is no longer about general technology or all growth stocks but rather assets closer to AI computing power, semiconductors, equipment, and the advanced manufacturing chain.

Public Fund's Large Technology Sector Holding has increased to 57.3%, with an over-allocation ratio rising to 18.5%, both reaching historical highs.

The changes in the Science and Technology Innovation Board (STAR Market) and the Growth Enterprise Market (GEM) also reinforce this point. In the second quarter, public funds increased their holdings in the STAR Market by 9.9 percentage points and in the GEM by 3.5 percentage points, both hitting record highs. The rise in holdings in these two major emerging sectors indicates that funds are not only buying into a few leading industries but are also increasing overall exposure to high-growth technology assets.

In the second quarter, public funds significantly increased their holdings in and over-allocation to the STAR Market and GEM, both hitting historical highs.

Expansion of Technology-themed Funds: Institutions Not Just Engaging in Short-term Portfolio Adjustments

If the industry's holding changes are only seen on a quarterly basis, it is not enough to illustrate the fund trend. The expansion of actively managed technology-themed funds shows that this round of changes has been reflected in the product structure.

UBS defines actively managed technology-themed funds as actively managed funds where at least 7 of the top ten heavily weighted stocks are from the technology sector, with a combined weight of over 50%. According to this criterion, the proportion of such funds in the total AUM of all actively managed public funds has risen to 27.5%, reaching a historical high.

This proportion is significantly higher than the proportion of actively managed funds tracking technology indices, and higher than the relative popularity peaks of themes such as consumer goods and new energy. An increasing number of actively managed funds are not allocating a small amount of tech stocks in their portfolios but are positioning technology as a primary direction.

The proportion of AUM in actively managed technology-themed funds has increased to 27.5%, surpassing the levels seen during the peaks of consumer goods and new energy themes.

This has two-sided effects on the market.

On the one hand, the warming trend in technology allocation will strengthen sector liquidity. Sectors such as electronics, telecommunications, AI infrastructure, semiconductor equipment, and industrial technology chains may receive stronger valuation elasticity due to institutional fund concentration.

On the other hand, with holdings and over-allocations at historical highs, trading congestion could more easily become a source of short-term volatility. The recent global tech stock fluctuations and the A-share tech sector correction may be related to profit-taking, cooling trading activities, and tightening of margin financing, rather than an abrupt deterioration in fundamentals.

This is also why the report did not directly equate second-quarter increase in holdings to the establishment of a "hard technology bull market." Funds have clearly shifted towards hard technology, but the high allocation itself has increased short-term drawdown sensitivity.

Northbound Funds Returning, Publicly Stated Position and UBS Classification Pointing in the Same Direction

Foreign capital inflows have provided another layer of evidence for this round of hard technology allocation.

Public reports indicate that CMB Securities estimated a net inflow of approximately 223.0 billion yuan of northbound funds in the second quarter, while Guosen Securities estimated it at 219.3 billion yuan. Citing Choice data, South China Morning Post reported that as of the end of June 2026, northbound holdings through the Stock Connect reached 3.13 trillion yuan, hitting a new quarterly high since the connect was established.

Industry flows need to distinguish criteria. The more common industry classifications in public reports, such as Shenwan and CITIC, show more inflows into sectors like power equipment, electronics, and machinery equipment. Under the industry classification used by UBS, there was a net purchase of 128.5 billion yuan in industrials and 67.2 billion yuan in IT, which were the major directions of inflows.

According to the UBS industry classification, northbound funds saw a net inflow of around 223.0 billion yuan in the second quarter, with industrials and IT being the main inflow directions.

Regardless of the industry classification used, second-quarter foreign capital inflows tended to lean towards industrial technology, IT, and the advanced manufacturing chain. The alignment between domestic and foreign capital in hard technology has significantly increased compared to mutual fund's increased positions in electronics, telecommunications, and machinery.

Such fund movements will affect the market's assessment of A-share structural trends. For some time, A-share investors have been concerned about the rapid rise of tech stocks, overheating margin trading, and insufficient profit-taking. If both domestic and foreign funds simultaneously increase their holdings in hard technology, while profit expectations are being revised upwards, market discussions will shift from "whether there is a fundamental basis" to "whether the rise is too fast."

UBS predicts that the year-on-year growth rate of overall A-share earnings will rise from 3.9% in 2025 to 11% in 2026. This provides a stronger explanatory basis for institutions to increase their positions in technology and growth assets. Capital is flowing into hard technology not only because of the hot AI theme but also because profit expectations, industrial profits, and policy directions are aligning to provide support in the same direction.

Deleveraging May Be Nearing the End, High Allocations Will Still Amplify Volatility

During the second-quarter tech stock pullback, the market's greatest concern was the retreat of leveraged funds.

UBS believes that A-share margin balances have rapidly fallen from their peak, and the leverage ratio in the technology sector is roughly in line with the overall market. Meanwhile, the Shanghai and Shenzhen 300, ChiNext, and STAR 50 ETFs have seen increased trading volumes and significant net inflows, indicating that the deleveraging phase may be approaching its end.

However, constraints still need to be observed here. Whether the deleveraging has truly ended depends on whether the financing balance can remain stable and whether ETF fund inflows can continue. If the subsequent leveraged funds contract again, or if global technology stocks once again experience drastic fluctuations, A-share hard technology may still face dual pressure from valuation and sentiment.

Policy support is another long-term indicator. AI, advanced manufacturing, domestic substitution, and industrial upgrading are still important pillars of China's technology assets, making the hard technology sector more likely to attract medium- to long-term fund attention. However, a clear policy direction does not guarantee a linear short-term increase in stock prices.

In the second quarter, funds have significantly leaned towards hard technology, with public offerings, tech-themed funds, and northbound funds all sending the same signal. The issue is that holdings and overweights are already at historical highs, making the sector more sensitive to external fluctuations, profit-taking, and changes in financing. Whether the hard technology market can sustain its momentum ultimately depends on whether profit improvements, progress in deleveraging, and the return of foreign funds are realized simultaneously.

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