UBS Equities-China Equity Strategy _2Q25 investor positioning update - br...-117173865

ab11 August 2025Global ResearchChina Equity Strategy2Q25 investor positioning update - broadly unchanged EM funds added while global funds cut slightly China equity holdings among international institutional investors stayed broadly unchanged in 2Q25 (-1.6% vs -1.5% in 1Q25) as investors likely took a wait-and-see approach in light of the tariff uncertainties and the sharp rally in the previous quarter. We observed divergent flows among funds with different mandates, with EM funds turning less underweight, while global funds cut their China positions slightly. The top 40 global investors' Chinese equity holdings (including ETFs) were also broadly unchanged from the recent peak seen in 1Q25 at c.1%. Foreign investors added the most positions in auto, tech, property and renewables, and sold consumer and internet in 2Q. From a stock connect perspective, southbound inflows remained robust at US$37bn after the record inflows in 1Q25 (US$56bn), with top bought sectors including financials, consumer discretionary and healthcare. Meanwhile, northbound inflow accelerated to c.US$9bn with industrials, health care and financials the top bought sectors. 20% of funds still not holding Chinese equities Our tracking of c.800 active foreign funds which altogether hold c.US224bn of Chinese equities showed the underweight positions relative to the benchmark were broadly unchanged during 2Q25. Overall, 167 funds (AUM US$242bn) do not hold any Chinese equities as of 2Q25 (mostly global mandated funds), similar to the level in 1Q25. Our tracking of EM flows suggests the inflows into China in 1Q25 might have come from outflows from other EM regions (e.g. India and Korea), while in 2Q25 the outflows from other EM regions have broadly stabilised.Southbound inflow remained robust while northbound flows also picked up Southbound inflows stayed elevated during the quarter at US$37bn despite a record inflow of US$56bn in the previous quarter. Financials remained the top bought sectors in 2Q, however southbound investors turned more selective in the internet and tech space (sold Tencent and Xiaomi, while bought Meituan and Alibaba) and added more healthcare. Northbound inflows accelerated to US$9bn, above the previous quarter's US$3bn, with the top bought sectors including industrials, healthcare and financials. The acceleration in northbound flows may have supported the narrower A/H performance gap in 2Q (1% for CSI300 vs 2% for HSCEI).Foreign investor sector flows and recent crowdedness observationsActive foreign institutional investors continued to reduce holdings in consumer-related stocks while their holdings in internet stocks were also reduced in 2Q possibly due to the price war in food delivery. Meanwhile, they added auto, tech, property and renewables in 2Q25. UBS Quant team data suggests institutional holdings (long only and hedge funds) are the most crowded among the internet, tech and insurance names (as of 31 July). Property saw the largest increase in in