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UBS China Equity Strategy Research Head Wang Zhonghao noted that the Chinese AI tech hardware stocks tracked by UBS Investment Research saw a 32% decline in July, with 36% of the tracked stocks experiencing a drop of 40% or more during the month. Meanwhile, the A-share margin balance has fallen from a high of 3 trillion yuan to 2.6 trillion yuan, approaching the level before the recent leverage increase in early April. As a result, it appears the worst phase of technical selling and de-leveraging has passed.

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Concurrently, the global AI narrative has shifted positively, driven by the performance of major US cloud service providers. With valuations for Chinese AI tech hardware stocks having significantly retreated to just slightly above historical averages, and earnings per share forecasts continuing to be revised upward, the bank believes it is now time to re-enter the market. However, given recent stock price volatility and ongoing concerns about AI monetization, investors may not embrace AI tech hardware as enthusiastically as before. Consequently, the bank expects stock performance breadth to be more dispersed than it has been since the start of the year, and some funds may flow back to previously pressured sectors such as Chinese internet, power equipment, and non-ferrous metals.

AI stock performance breadth may be more dispersed

With the margin balance having fallen back to April levels, and many tech stock prices retracing to near their April levels, the market may have weathered the worst of the technical sell-off. Overall, the A-share collateral ratio appears healthy at 280% of margin loans, suggesting there is still some downside protection if another technical sell-off occurs. Recent support from the Hong Kong government for tech ETFs has also helped stabilize confidence, while stable stock prices may attract some fundamental investors back to the market. The bank's discussions with investors indicate that, given the progress in semiconductor localization, Chinese tech remains a key focus for global investors. From a global perspective, tech stock leverage appears to have declined, with South Korea's margin loan balance now near the level of early 2026, and leveraged ETF assets under management dropping by approximately 50% in South Korea and 30% in the US.

Global AI market outlook has improved

The bank states that the global AI market outlook has improved, mainly reflected in the following aspects: (1) Microsoft and Amazon's results show strong growth for OpenAI and improved AI monetization capabilities; (2) strong demand from AI-native companies; (3) increased backlog orders for large cloud service providers, indicating improved growth prospects for cloud vendors; (4) accelerating enterprise adoption of AI, with average AI spending increasing 25% quarter-over-quarter. For many Chinese AI stocks, their prices were dragged down by the global sell-off. However, during this process, their narrative and fundamentals have not changed: the local Chinese tech supply chain is catching up, and with improved domestic GPU supply, the bank expects AI data center (AIDC) construction to accelerate in the second half of this year. The stabilization of the global AI narrative helps investors refocus on the fundamentals of China's AI supply chain stocks.

Market breadth may not be as narrow in the second half

UBS believes that market breadth may not be as narrow in the second half of the year. While the bank remains positive on tech fundamentals, recent stock price volatility and some ongoing uncertainty about AI monetization may limit the stock price performance of related stocks in the short term. Therefore, the bank expects cross-sector performance in the second half to be less concentrated than in the first half. Within the AI tech hardware sector, the bank's preference remains focused on semiconductor equipment, network chips, and advanced packaging, which are the less cyclical parts of the AI theme. Outside of tech hardware, the bank's preferred sectors include: (1) internet, benefiting from improved earnings trends, AI narrative shifts related to large cloud service providers, and cheap valuations; (2) power equipment, due to cheap valuations and benefiting from AI data center construction and energy independence; (3) non-ferrous metals, due to strong earnings trends; (4) "going global" stocks, as the impact of currency appreciation begins to fade.