China Equity Strategy "How crowded is the AI trade and other frequently ..."

Research evidence excerpt

China Equity Strategy "How crowded is the AI trade and other frequently ..."

I names indicate that investor positioning has

risen this year, although there has been a modest pullback from the high recorded in

early May 2026 (Figure 3); 3) Turnover in the broader TMT sector is elevated at ~37% of

total A-share turnover, compared with a historical peak of 43% in 2023. Looking at

regional flows and positions, foreign investor outflows from Taiwan and Korea equities

(both global AI proxies) this year suggest some broad profit taking in this space.

Meanwhile, domestic token pricing has been rising and while valuation is high with

semi's for example trading on 59x forward P/E (2.5 std. dev above historical average

shown in Figure 41), earnings growth in the sector has also been accelerating (up 64%

in 1Q26). It is difficult to specifically pinpoint the events that could derail the tech rally

with some investors pointing to the rising US interest rates, IPO's of the large LLM

companies and a slowdown in earnings growth as potential sign-posts that could trigger

a re-assessment of positioning.

Would higher PPI lead to lower earnings?

Investors were concerned whether imported inflation would squeeze corporate margins

given the recent surge in energy prices. We think a higher PPI may not hurt overall listed

company earnings given the following observations: 1) higher PPI's historically have led

to higher revenue and earnings growth in listed companies. This relationship also held

up during the Russia–Ukraine war in 2022, when supply disruptions also drove a surge in

energy and transport prices; 2) exporters' earnings historically have done well in periods

of imported inflation as this gives companies an excuse to raise prices (Figure 23), 3)