UBS Equities-China Equity Strategy _Q125 mutual fund position review add...-114873534

ab23 April 2025Global ResearchChina Equity StrategyQ125 mutual fund position review: added AI/growth/Hong Kong listed stocksAdded auto/non-ferrous metals/machinery; cut electrical equipment/telecom/non-bank financialsThe top-3 sectors by mutual fund (MF) position increase in Q125 were auto, non-ferrous metals and machinery -- the corresponding increases were 1.6ppt/1.5ppt/0.5ppt (Figure 1). The 'China Innovation' and AI themes regained investor attention, driven by a string of made-in-China tech products debuting around the Chinese New Year holiday, led by DeepSeek. In the A-share market, humanoid robot stocks, perceived as having the highest correlation with AI, saw significant MF position increase, demonstrated by a sharp rise in weighting/overweight metrics for auto and machinery. The computer sector, deeply tied to the broader AI theme, was also favoured by MF in Q125, which took the fourth slot by position increase.Preferred growth over value amid recovering risk appetiteIn Q125, market sentiment improved notably on a string of innovations brought by China businesses, as well as a stabilising macroeconomy. The sentiment shift was echoed by MF actions in Q125, ie enhancing positions in growth stocks while cutting back on high-dividend names. We see a divergence among defensive sectors: telecom, coal and utilities witnessed substantial position decreases, while banks saw position increase for five straight months. By board, the Main Board saw a 0.7ppt MF position increase in Q125; the Star Board saw a further 0.7ppt rise to a new record high of 14.4%, showing MFs' preference for growth; the ChiNext saw a 1.5ppt cut to 18.6%, which though remained at high level in history. However, with geopolitical risks on the rise since Q225, MF investment styles might have changed lately.MFs headed south, lifting their positions in the Hong Kong listed stocks to record highIn Q125, MFs significantly raised their stakes in the Hong Kong listed stocks. Our data show that their holdings in the Hong Kong listed stocks jumped to 17.3% in the first quarter, rising 5.1ppt from end-Q424 and reaching a new record high. In our report "Global marketing feedback and 10 most asked questions", we noted two major reasons behind the outperformance of the Hong Kong stock market over the A-share market in Q125: 1) A-share heavyweights are mostly financial/consumer/industrial stocks, while the Internet and tech sectors take the bulk of HSI and MSCI China; 2) new active-MF issuance for A-share was muted, while the Hong Kong listed stocks benefitted from southbound investment (Rmb411.3bn in Q125) and inflow of overseas funds, on a net basis. For full-year 2025, however, we believe the A-share market could catch up with the Hong Kong market, as 1) currently the A/H premium is 1 SD below the 5-year average, and the mean reversion rule means the A-share market could bridge its gap with the Hong Kong stock market over time; 2) the Hong Kong stock market is more susceptibl