UBS: Downside risk for A-shares is limited; the pullback stems from a concentrated release of crowding in the tech sector.

UBS Securities China equity strategist Meng Lei published an A-share strategy report stating that the downside risk currently facing the A-share market is limited, due to ETF inflows and A-share earnings still being in an upward cycle, among other factors. The recent pullback stems more from a concentrated release of investors' previously elevated crowding in the tech sector, while public mutual funds also face pressure from "redemption upon breaking even." Meng Lei pointed out that since 2024, whenever the Shanghai Composite Index has rapidly pulled back below key levels, ETFs have consistently seen sustained net inflows. Recent net inflows have been distributed across CSI 300 ETFs, CSI 500 ETFs, CSI 1000 ETFs, ChiNext Index ETFs, and STAR 50 ETFs. He stated that the tech sector's weekly turnover as a proportion of the entire A-share market has now fallen back to the level seen in early April this year. The trading crowding of the top-ranked stocks by turnover has also declined sharply in tandem, indicating that tail risk and trading crowding have largely been released. The probability of off-market funds flowing back quickly in the short term is low, as the repair of their risk appetite still requires time.