Guosen: After the increase, how do we objectively judge the crowding of AI?

Guosen released a research report stating that since the beginning of the year, AI-related sectors have led the way, while traditional sectors have clearly underperformed. In the rebound market in April, the differentiation in structure became even more pronounced. Looking at the comprehensive perspective of portfolio structure, trading volume, and excess rotation, Guosen believes that currently, the overcrowding in AI hardware and electrical new is relatively high but may not have reached its peak yet, while the enthusiasm for AI applications and resource commodities has declined to a moderate level, with the enthusiasm for consumer goods and real estate still being relatively cold. The firm believes that the upward trend in the market remains unchanged, and recommends a balanced allocation based on industry overcrowding, with a focus on technology growth themes, strategic resources, as well as liquor and real estate sectors. Guosen's main views are as follows: Since April, against the backdrop of easing geopolitical tensions, the equity market has experienced a significant rebound. As of April 24, the Wanda Full A Index has risen by 7% in April, with some growth industries performing quite well. Since the beginning of the year, sectors such as communication and electronics have seen increases of 25% and 21% respectively, with the optical module concept index rising by 39%, indicating significant excess returns for the AI hardware sector. After this wave of rebound, how crowded are the various industries currently? How to objectively measure the overcrowding in popular sectors such as AI? These aspects are discussed in the following text. In recent periods, there has been a significant divergence in performance among various industries, with "optoelectronics" leading the way while traditional value sectors have performed poorly. Since the beginning of the year, the Shanghai Composite Index has fluctuated within the range of 3800-4200, during which time the A-share market has shown a clear differentiation in structure. Industries such as communication (up 32% since the beginning of the year, following the same trend), coal (19%), electronics (18%) have seen the greatest increases, while sectors like commerce and retail (-14%), non-banking financial services (-13%), and beauty care (-8%) have faced the largest drops. Particularly in April, against the backdrop of easing geopolitical tensions, the A-share market has seen a rebound, with the phenomenon of structural differentiation becoming more pronounced, with sectors like communication (up 25% since April, following the same trend) and electronics (21%) leading the way, while transportation and agriculture sectors are still down, with more than two-thirds of industries seeing increases of less than 5%. It is evident that the recent market rebound has been mainly contributed by sectors such as optical communication and electronics, while other traditional value industries have shown relatively weaker performances. Are these leading industries overheated? In order to assess the degree of overcrowding in various industries, we will analyze and compare them from the perspectives of portfolio structure, trading volume, and excess returns. In terms of portfolio structure, the overheating in communication and new electrical sectors is relatively high but not at its peak, while sectors such as consumption and real estate have lower enthusiasm. Recently, the details of the holdings of popular stocks of public funds in Q1 2026 were officially disclosed, and we present an analysis of the distribution of institutional funds' holdings based on the most transparent active equity fund data. Currently, the enthusiasm for communication and new electrical sectors is high, the enthusiasm for electronics and non-ferrous metals has fallen from the high levels, while the enthusiasm for consumption and real estate sectors is relatively low. Under the criteria of overweight holdings, the main industries of public funds in Q1 2026 were communication (with a holding market value ratio of 13%, following the same trend), and power equipment (13%), with the proportion of the two holdings from the lowest to the highest of 100% and 83% in the historical percentile levels; the holdings ratio of electronics (22%), non-ferrous metals (7%) has fallen from the fourth quarter to the current level, but their historical percentiles are still at 96% and 98% respectively; as of Q1 2026, the holdings in food and beverage (4%), real estate (0.3%), pharmaceuticals and biotechnology (8.5%) were still low, ranging from 2% to 12% on a historical percentile scale. Currently, the clustering phenomenon of institutions is not significant, and the overcrowding of fund holdings may not have reached its peak. Firstly, looking at the concentration of industries with high holdings, in history, when the market value ratio of holdings of a single industry by public funds exceeds or approaches 20%, there is often pressure for profit-taking and a gradual downturn in holdings, leading to a gradual narrowing of excess returns compared to the benchmark. As of Q1 2026, the industries where fund holdings exceed 20% were mainly in electronics (22%), power equipment (13%), and communication (13%), leaving some room before reaching the 20% threshold. Secondly, looking at the clustering phenomenon of institutions, we measure the change in the proportion of overallocation of active equity funds for the quarter as an indicator to observe the behavior of funds adding positions, and find that in Q1 2026, active equity funds significantly increased their positions in about 12 secondary industries, which is at the median level of 46% compared to the 13-year period, indicating that public funds as a whole have not yet shown a concentration on a few sectors. In terms of trading volume, the heat in optoelectronics has reached historical highs, while the heat in resource commodities and consumption has declined somewhat. We calculated the historical percentile levels of three indicators turnover rate, trading volume as a percentage of market capitalization, and valuation for each industry since 2005, to comprehensively measure the overall trading heat of the industry. In addition, we further subdivided the optoelectronics market into individual sectors for communication, electronics, and new electricity. On one hand, in industries with high trading heat, the heat has continued to rise in sectors like optoelectronics, dominated by communication equipment and components, while heat in computers and resource commodities has dropped from peak levels. As of April 24, some sub-sectors of electronics and communication have seen their overall trading heat rise to high levels, with sectors like communication equipment and components, represented by optoelectronics, seeing their trading heat increase from 69% and 82% lows two months ago to current levels of 91%, respectively, indicating that military, power grids, and wind energy equipment industries have also seen high trading heat, all above 75%. Moreover, heat in computers, non-ferrous metals, and basic chemicals has fallen back from peak levels, with the three sectors dropping from 76%, 71%, and 85% respectively two months ago to current levels of 58%, 54%, and 63%. On the other hand, the heat in sectors such as consumption and finance remains relatively low. As of April 24, low-heat industries are mainly concentrated in sectors such as consumption and finance, with most of these industries showing a continued decline in heat over the last two months. Particularly, the heat in non-banking financial services and transportation sectors has fallen below 25%, while the trading heat in categories like food and beverage, agriculture, banking, pharmaceuticals, and cosmetics and personal care remains at levels below 40%. In terms of excess returns, sectors such as communication and new electricity have turned towards outperformance, while sectors like consumption, real estate, and non-banking financial services have underperformed. Excess returns are another indicator of sector strength and weakness, historically, when a sector significantly outperforms the market, the heat is likely at a high level in the short term, with excess returns gradually converging, and vice versa. We use the positioning of each industry in the Relative Rotation Graph (RRG) to compare the relative performance of each sector against the market in both the short and long term. The first quadrant in the RRG graph represents the overbought area, while the third quadrant represents the oversold area, with the other two quadrants being transitional zones. Since it is difficult for any sector to consistently outperform or underperform the market, the movements of sectors on the RRG graph tend to be circular. On one hand, sectors like communication and new electricity have recently shifted from transitional zones to overbought zones. As of April 24, the communication and new electricity sectors have recently moved from the transitional zone in the fourth quadrant of the RRG graph to the overbought zone in the first quadrant. When looking at subdivisions within these sectors, it is primarily the communication equipment and batteries that lead the overperformance, with communication equipment potentially reaching a peak position, indicating that these sectors have accumulated significant excess returns recently, with short-term heat levels already quite high. In the technology growth sector, the sub-sectors of computer equipment, consumer electronics, and semiconductors are showing momentum recovery and have not yet reached overbought territory. On the other hand, some sectors such as consumption, real estate, non-banking financial services, and media/computer have recently turned towards oversold regions. As of April 24, the software, media, commerce, apparel, automotive, and community service sectors have transitioned from the transitional zone to the oversold zone in the third quadrant of the RRG, indicating a decrease in heat levels. Taking into account portfolio structure, trading volume, and excess returns, currently, sectors like communication and new electricity have relatively high heat, but when combined with the current portfolio structure, the sentiment may not have peaked yet. Meanwhile, sectors such as computers, media, and resource commodities have seen their heat levels drop from previous highs, with overall heat levels being moderate. Additionally, sectors like consumption, real estate, and non-banking financial services have low heat levels and are showing a continued decline. In the short term, the upward trend in the market remains unchanged. In previous reports such as "How far has the rebound gone? - April 18, 2026" and "The turning point is in April - April 11, 2026", it has been repeatedly mentioned that the bottom of the market may have been found, and April will see a turning point in the rebound. The recent market performance has been impressive, with the Shanghai Composite Index rising by 4.8% since April, closing above 4100 points mid-week; the Growth Enterprise Market Index has risen by 15.1%, hitting a new high in nearly 10 years. Looking ahead, the market has accumulated significant gains since the rebound, and there may be temporary fluctuations after rapid rises. However, driven by positive factors at home and abroad, the upward trend in the market remains unchanged. On one hand, easing geopolitical tensions abroad, coupled with Trump's visit to China in May, is boosting risk appetite. With the constraints of the upcoming U.S. midterm elections and inflation pressures, Trump is motivated to ease tensions in the Middle East. On April 21, Trump announced an extension of the ceasefire with Iran, and talks for a second round of negotiations between the U.S. and Iran are underway. Looking ahead, the overall external environment is improving, and the mid-May meeting between Chinese and U.S. leaders is expected to further strengthen consensus in core areas, potentially boosting market risk appetite. On the other hand, domestic efforts to stabilize economic growth are driving fundamental improvements. In the first quarter of this year, national general public budget expenditures reached 7.5 trillion yuan, the fastest pace of expenditure in nearly five years, indicating proactive fiscal support. On April 17, the National Development and Reform Commission announced plans to implement a strategy to expand domestic demand and accelerate the implementation of 109 major projects; on April 22, the NDRC and 15 other departments jointly issued a document emphasizing the deepening implementation of childcare subsidies and exploring a comprehensive support policy for childbirth in areas such as housing, transportation, and consumption. The fundamental improvement is gradually taking shape under the policy stimulus for expanding domestic demand, and macroeconomic data since the beginning of the year have shown a good start, with the March manufacturing PMI at 50.4%, indicating a return to expansion territory. In terms of structure, industry allocation should be reasonably balanced. As mentioned earlier, the current high heat in sectors like communication suggests a temporary overcrowding phase, while traditional value sectors such as consumption have reached low levels of heat, indicating an opportunity for a balanced distribution. In the medium term, sectors with an upward trend in industry pace such as technology growth remain important themes. The current technology industry, represented by AI, is in a new upward cycle, with domestic AI models like Deepseek, Qianwen, and Kimi leading the global intelligent level. On April 24, DeepSeek V4 was released, with the official statement indicating that in Agentic coding tests, V4-Pro has reached the best level among open-source models, while simultaneously supporting 1 million token contexts. After the release of DeepSeek V4, Huawei Computing announced support for DeepSeek V4 across its Ascend Super Node products. Overall, the future application of AI is expected to accelerate, and sectors like AI applications, computing hardware, and upstream energy and electricity are worth noting. Additionally, strategic resources and sectors related to liquor and real estate should be considered with a focus on safety. In terms of resources, sectors such as non-ferrous metals and chemicals have seen their overheat levels drop from high levels, and in the complex external environment, the safety premium for resources is expected to rise in the long run. Coupled with the implementation of domestic anti-scavenging policies and support for new demand, the strategic resources sector is expected to continue to benefit. In terms of liquor and real estate, with consumption and real estate sectors currently at historically low levels of overcrowding, underpinned by expanding domestic demand policies, the assets of established brands may see expected reversals. Since the beginning of the year, signs of improvement have been seen in both consumption and real estate, with prices of premium liquor brands like Feitian Maotai rising from 1490 yuan to nearly 1600 yuan in April, and new and second-hand housing prices in first-tier cities rising month-on-month in March. With policy support and positive catalysts, undervalued real estate and liquor brands may see a period of recovery opportunity. Risk warning: Geopolitical tensions worsening beyond expectations, fluctuations in domestic economic recovery.