Chinese funds push electronics allocation to record 43.4% before tech crash

Chinese active equity funds allocated a record 43.4% of holdings to the electronics sector by end-June, an extreme concentration that left the market vulnerable to the 30% to 40% technology stock rout that followed in July.

"The extreme concentration in electronics reflects an unprecedented shift in A-share fund allocation patterns," analysts at Chenming Strategy Research wrote in a quarterly review, noting the previous record was banks at 30% of fund holdings in 2009.

Electronics' weighting exceeded the sector's 23.6% share of A-share free-float market capitalization by about 20 percentage points, the largest single-sector overweight in Chinese fund history. The iShares Semiconductor ETF entered a bear market, falling more than 20% from its peak, while Marvell Technology lost 40% of its value. UBS set a $340 price target on Marvell, implying 64% upside, citing the company's Compute Express Link business with a total addressable market estimated at $4.5 billion by year-end and $10 billion by 2030.

The concentration poses a dilemma for fund managers heading into the second half: technology remains the medium-term structural theme driven by AI capital expenditure, but the July correction has erased months of gains and forced redemptions. Non-AI sectors that were starved of capital in the second quarter — including new energy, pharmaceuticals and metals — may attract rotation flows if the tech selloff deepens.

Fund flows show dramatic rotation into AI, out of everything else

Active equity funds saw net redemptions of about 170 billion yuan ($23.4 billion) in the second quarter, even as total fund inflows — including private placements and fixed-income products — reached 200 billion yuan, down from 720 billion yuan in the first quarter. The divergence highlights a two-tier market: 352 funds that delivered year-to-date returns above 100% attracted net subscriptions, with 74.4% of them seeing inflows, while mediocre performers bore the brunt of redemptions.

The rotation out of non-AI assets was stark. Fund allocations to Hong Kong stocks fell 5.3 percentage points quarter-on-quarter. New energy dropped 5.5 points, pharmaceuticals declined 3 points, metals fell 3.3 points and food and beverage slid 2.7 points. Only three sectors — electronics, communications and building materials — saw net overweight increases relative to their free-float market weights.

Custom silicon and CXL emerge as next catalysts

Despite the broad selloff, pockets of the semiconductor supply chain continue to attract analyst attention. The custom silicon trend — where hyperscalers design their own chips to avoid Nvidia's gross margins, which have exceeded 70% — remains a structural tailwind that could support select semiconductor names as the broader sector corrects. Marvell's capital-light model and exposure to AI inference workloads position it to benefit, according to the UBS note.

What comes next

The July selloff has brought technology valuations closer to historical averages, but the fund flow data suggests the unwind may not be complete. The CSI 300 Information Technology index has fallen roughly 25% from its June peak, and the Shanghai Composite has retreated about 8% over the same period. The next catalyst for the sector will be the U.S. mega-cap earnings season, where capital expenditure guidance from Microsoft, Amazon and Alphabet will set the tone for AI-related semiconductor demand.

For fund managers, the second half presents a critical decision point. Technology remains the structural bet, but the extreme concentration of Q2 has created fragility. Sectors that were starved of capital — brokerages, copper producers, energy storage and innovative drugs — may offer better risk-reward if the tech correction extends, based on their second-quarter earnings momentum and low institutional ownership.

This article is for informational purposes only and does not constitute investment advice.