Guosen: External fluctuations do not change the bullish market atmosphere; the second wave of opportunities in technology hardware may be in the fourth quarter.

Guosen released a report stating that, from a chip perspective, the current power of institutional investors in the A-share market is roughly equal. The holdings of foreign capital, private equity, insurance funds, and both active and passive public funds are all around 4 trillion yuan. In the second quarter, the positions of various investors in AI hardware had reached extremes, but since July, during the adjustment of the relevant sectors, the chip positions for AI hardware among different funds have fallen back from the extreme positions, with most clearing down to around 60-80% of their highs. The bank believes that external fluctuations do not alter the bullish sentiment, and the second wave of opportunities in technology hardware may arise in the fourth quarter, emphasizing the need for balanced allocation in AI applications, pharmaceuticals, and resource-based sectors. Guosen's core viewpoints are as follows: As of this week, the performance mid-reports of A-share listed companies and public fund mid-reports have been fully disclosed, clarifying the holdings of various investors for Q2 2026. Recently, the tech sector's performance has remained sluggish, leading to much discussion about whether there will still be opportunities in the growth sector of technology in the future. We have meticulously calculated how different investors holdings in AI hardware have been cleared, and we are projecting the future trends of technology from a chip perspective. Currently, the pricing power of various institutional investors in the A-share market is approximately equal. Based on the latest disclosed mid-reports of funds and listed companies, and with calculations based on the free float market capitalization, active equity public funds (about 7% of the total market capitalization in Q2 2026), passive equity funds (6%), foreign capital (8%), private equity (8%), and insurance funds (7%) all hold comparable shares. Additionally, compared to the previous quarter, individual investors (an increase of 1.3 percentage points), active equity public funds (1.0 points), foreign capital (0.8 points), and private equity (0.2 points) have seen an uptick in their pricing power, while insurance funds (-0.5 points) have experienced a decline in pricing power. In the second quarter, the holdings of various investors in AI hardware had reached extremes. In terms of structure, during the extreme differentiation of AI and non-AI sectors in Q2 2026, the concentration of holdings in AI by different investors may have also reached extremes, specifically: Individual Investors: Measured by the distribution structure of financing balances, the share of electronics and communication in Q2 2026 was about 29%, representing the historic extreme level of 100% since 2019, while their under-allocation in electronics and communication relative to free float market capitalization was about 1.4 percentage points, still at a historical low of 0% since 2019. Active Equity Public Funds: The complete stockholding criteria disclosed in the fund mid-reports indicate that the share of electronics and communication in Q2 2026 constituted 52% of the A-share holdings of active equity funds, which is close to the 60% of the concentration of heavy stocks according to the second quarter report; under any criteria, the holdings and overweight ratios of active equity public funds in AI hardware are at historical highs. Foreign Capital: Foreign capital includes long-term stable foreign investment and short-term flexible foreign investment, with their respective holdings in electronics and communication at 31% and 34%, representing an overweight of 0.6 and 2.9 percentage points relative to free float market capitalization respectively, and the holding proportions and overweight ratios are likewise at the historical extremes since 2019. Private Equity: Based on the industry allocation ratio of the Huaren Trust CREFI index component funds, private equity's allocation in the "Technology Hardware and Equipment" sector is 19.2%, far exceeding the holdings in other sectors, and both their holdings and overweight ratios are also at historical extremes. Insurance Funds: Based on calculations using the concentration of heavy stocks in listed companies, as of Q2 2026, insurance funds held 8% of the electronics and communication sector. Considering that insurance funds have historically concentrated on finance and dividend stocks, their current allocation in technology hardware is also at a historical extreme level, corresponding to the 97th percentile since 2019. In summary, Q2 saw different investors reaching historical extreme levels in terms of absolute holdings in the AI hardware sector, and aside from leveraged funds, the active public funds, foreign capital, and private equity that saw a rise in pricing power also reached the highest level historically. Since July, the holdings of various funds in AI hardware have been cleared to about 60-80% of their peaks. As mentioned earlier, by Q2, the absolute holdings of different investors in AI hardware had reached historic extremes. However, since July, following adjustments in the relevant sectors, various funds have exhibited different degrees of unwinding activity. Specifically: Individual Investors: Since July, the financing balance for electronics and communication has seen a maximum outflow of approximately 180 billion yuan, with the proportion relative to the overall financing balance dropping from a peak of 29% to a low of 26%, a drop of about 3 percentage points, bringing the absolute scale to levels similar to mid-May. However, compared to the approximately 7 percentage point drop in the sectors free float market capitalization, the reduction in individual investor capital in AI hardware is not substantial. Active Equity Public Funds: We previously estimated in the report "The Historic Rally, What Impact on the Technology Market? - 20260725" whether the active equity public funds heavily invested in technology have begun to switch their holdings. As of now, the proportion of funds significantly reallocating from technology may be close to 25%. In terms of changes in industry overweight ratios, compared to Q2 2026, we estimate the current heavy technology funds overweight ratio in the electronics and communication sector has decreased by about 5 percentage points. Foreign Capital: Due to the current lack of high-frequency data on foreign capital in the A-share market, historical data shows that global foreign investors have exhibited somewhat uniform investment behavior towards Chinese technology assets. We use the high-frequency movements of foreign capital in Hong Kong stocks as a proxy indicator for A-share foreign investments. As of September 1, since July, long-term stable foreign capital in Hong Kong stocks had the highest outflow of approximately 4 billion Hong Kong dollars in mid-August, while short-term foreign capital had cumulatively flowed out about 10 billion Hong Kong dollars, making it one of the highest outflows among all sectors. In terms of absolute holdings, foreign capital's position in Hong Kong stocks in the semiconductor sector has dropped to levels seen at the end of April. Private Equity: In July, the Huaren Trust CREFI index component funds had allocation ratios of 14% for "Technology Hardware and Equipment" and 3% for "Semiconductors and Semiconductor Production Equipment," down about 5 percentage points and 3 percentage points month-on-month respectively, among the largest reductions across sectors, with current absolute holdings resembling those of April. In summary, during the adjustments in AI hardware since July, related holdings among various funds have exhibited some loosening. In terms of the extent of unwinding, most funds have likely cleared down to levels seen in April-May, with current holdings or positions lowering to about 60-80% of the highs seen in late June. The main technology line displays a dual M-top characteristic. Since late August, affected by external factors such as U.S. dollar liquidity and geopolitical factors, the technology weight sectors in the A-share market have undergone another adjustment, dragging down overall market performance. As mentioned earlier, we calculated that since July, chips in the AI hardware sector have seen some clearing, and we have highlighted in earlier reports that historical experience shows that stocks in high-boom industries typically lead prices to peak ahead of the fundamentals. Because industry prosperity often continues even after stock prices hit absolute highs, the trend does not come to an immediate end; consequently, the top formation often presents an M-shape. Currently, the congestion and excess returns in the AI hardware field have begun to converge, while the domestic policy and liquidity environment remain generally accommodative. As positive catalysts emerge through industry narratives, the technology hardware sector is expected to rise again around the fourth quarter, supporting overall market performance. Currently, a balanced allocation is essential, focusing on the diffusion of technology growth as well as related sectors such as real estate and resources. The current rotation and catch-up in industries will continue, highlighting the importance of style balanced layout. On one hand, attention should be paid to the internal diffusion of technology towards lower tiers. The revenue growth of overseas cloud vendors in AI remains high, and the trend in the AI industry does not change. Following the accumulation of positive factors such as the digestion of congestion and industrial catalysis, the AI hardware supply chain might still have upward opportunities in the future, potentially in the fourth quarter. Currently, the spread within technology is expected to extend towards the lower tier; key areas include AI applications with positive fundamental expectations and active industry-level catalysis, as well as Hong Kong technology. On the other hand, focus on undervalued resource products, real estate, pharmaceuticals, and brokerages. Looking at the year ahead, the probability of Federal Reserve interest rate hikes is low, and combined with tightening supply and demand and elevated geopolitical premiums, the fundamental boom for resource products represented by non-ferrous metals is expected to continue. Additionally, it's worth monitoring policy support for real estate, as well as pharmaceuticals and brokerages with relatively strong fundamentals. Risk Warning: Deterioration of geopolitical situations beyond expectations, fluctuations in domestic economic recovery.