(Yicai) July 21 -- UBS Securities, the Chinese securities arm of Swiss financial giant UBS Group, remains optimistic about China’s technology and artificial intelligence stocks despite a recent pullback in global equity markets, saying the sector is still expected to lead market gains in the second half of the year.

The recent cooling in the AI-driven technology rally has triggered declines in stock markets worldwide, including in China. However, UBS believes the unwinding of crowded positions has improved the outlook for the sector. Chinese technology shares rebounded today, with major tech-heavy indexes outperforming the broader market.

“After the trading congestion in the technology sector has eased, we believe that technology and AI stocks will continue to be the main market themes in the second half of this year,” Meng Lei, China equity strategist at UBS Securities, wrote in a report released today.

Benefiting from the rapid global development of AI and strong policy support in China, the technology sector is expected to maintain robust earnings growth, Meng said. He added that capital from technology-themed exchange-traded funds, actively managed mutual funds, equity financing, and private equity investors is likely to continue flowing into technology stocks.

Chinese mainland equities rebounded today after recent losses, with technology shares once again leading the gains. The Shanghai Composite Index closed 1.8 percent higher, while the Shenzhen Component Index climbed 4.8 percent. The tech-focused ChiNext Index and Star Market Index advanced 7.1 percent and 8.8 percent, respectively. 

Since the start of this month, the Shanghai Composite Index has fallen 5.6 percent, while the Shenzhen Component Index has declined 12 percent. The ChiNext Index and Star Market Index have dropped 15.1 percent and 18.3 percent, respectively.

Three Additional Investment Themes

Looking ahead, Meng said investors should focus on three additional themes besides AI. The first is sectors benefiting from AI-related capital expenditure, including data centers, power equipment, physical AI applications such as robotics, and commercial aerospace.

The second is industries experiencing earnings recovery, including lithium batteries, chemicals, securities firms, insurers, and innovative pharmaceuticals. If enthusiasm for AI investments continues to moderate, investors focused on earnings growth may rotate into these sectors, Meng said.

The third is investment opportunities arising from Chinese companies' overseas expansion. The proportion of revenue generated overseas by mainland-listed companies continues to increase, while overseas operations generally deliver significantly higher profit margins than their domestic businesses, he added.

Editors: Dou Shicong, Emmi Laine