The tides of the technology, media, and telecommunications (TMT) sector are rising, reminiscent of an era a decade ago, marked by an undeniable frenzy fueled by advancements in artificial intelligence and the digital economyRecent trading data reveals that the A-shares have witnessed a significant influx of capital directed toward the TMT sector, as reported by Minsheng SecuritiesNotably, the trading volume within the computer industry has consistently maintained a staggering 90% threshold, far exceeding historical averages for the past two months.

To put this in perspective, the TMT sector has experienced an extraordinary uptick, with trading volumes exceeding this 90% threshold for eight consecutive weeks, a stark contrast to the normNotably, from 2016, instances of TMT sector trading surpassing 90% have averaged a mere 4-5 weeks, indicating the current market energy is unusually robust

The evolution of this structural market trend has seen the TMT sector transition from an “institutional underweight” status to becoming a major hotbed of trading activity.

As highlighted in a recent Minsheng Securities report, many institutional investors have seemingly missed out on this recent surge in the TMT market, which reignited in early FebruaryThe Wind TMT Index recorded an impressive 15% increase from the end of January to March 24, while the median net value of equity funds fell by 2.5%. Strikingly, even the top 10% of performing equity funds only saw a median net value increase of 7.7% during this period.

The current overheated trading environment seems to be a corrective measure for those who missed earlier opportunitiesThe rapid ascent of TMT has given rise to two distinct opinions within the market: optimists who believe TMT is solidifying its position as the new mainstay of A-shares, and cautious investors who warn of potential risks brewing beneath the surface of such crowded trading.

As fund managers weighed the decision of whether to jump onto the TMT bandwagon, Cai Songsong, a notable figure in the industry, confidently returned wielding what could be described as “the sharpest spear.” As of March 27, statistics from Wind indicate that Cai's management of the Nuonan Active Return fund has yielded an impressive return of over 50% for the year, placing it at the forefront of actively managed equity funds

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Investors have expressed their admiration for “Manager Cai,” recognizing his continued sharp performance.

The success story surrounding Nuonan Active Return is one of notable turnaroundInitially launched as a mini-fund in August 2022 with insufficient capital, Cai quickly restructured the fund’s holdings away from its original focus on consumer goods and finance to concentrate on burgeoning sectors like semiconductors and information technologyHe foresaw the imperative shifts within these technological sectors, reinforcing the necessity for proactive investment amidst an impending surge in technology-driven markets.

Indeed, the market seems to have validated his foresightFollowing the trajectory of Nuonan Active Return, many other funds such as Guoxin Guozheng’s New Power Fund and Tianzhi’s Research Driven Fund have also achieved impressive gains, with returns exceeding 40% to date, primarily via aggressive investments in the TMT sector

However, it’s worth noting that these funds tend to have relatively small sizes, implying that only a modest number of investors have reaped substantial rewards during this TMT surge.

Contrarily, some fund managers acknowledge the exciting prospects within the TMT sector, yet their investment timing has been less than optimalFor instance, HSBC Jintrust's Liu Bin reflected during a recent presentation that early this year, he identified promising investment opportunities within the stock market, particularly within the TMT sectorHowever, he confessed that they may have underestimated the ongoing momentum and intensity of market trends following the Lunar New Year.

This rapid ascension of the TMT sector isn’t free of concernsGuojin Securities has noticed that the heightened trading activity within the TMT sector implies the potential for diminishing interest in other market sectors, especially as capital flows increasingly favor TMT at the expense of renewables and consumer goods.

The prevailing question now rests on whether to dive into the TMT market or remain an observer

The paramount uncertainty voiced by investors revolves around establishing whether the TMT sector is indeed entering a new phase of dominance or if it stands on the brink of a potential crisis due to excessive enthusiasm.

Li Bei, founder of Bansha Investment, stands out as a rarity among fund managers, openly addressing the risks involvedShe remarked on March 24 during an investment summit that the current AI-related market trends have reached an exaggerated level that could be detrimental, likening the trending enthusiasm in the A-share market to an unsustainable boom, since a significant portion of trading volume has been funneled through AI-related stocks.

Amidst this backdrop, more cautious investment sentiment surfaces as research reports from various firms, including Zhongtai Securities, caution stakeholders about the extremity of TMT trading volumes, reinforcing the need to remain vigilant against looming risks

They highlight that TMT's fundamentals may lack support against the backdrop of high trading frenzies, diminishing the probability of replicating the previous peak market performances seen in 2014-2015.

Yet even amidst debates among investors, optimism lingers in some cornersGuojin Securities boldly asserts in its reports that TMT exhibits characteristics indicative of a burgeoning new investment line poised to dominate the market over the next few years, with the initial grounds being solid fundamentals on the rise and remarkably low institutional allocations.

Three specific conditions were noted to support this optimistic view: firstly, the TMT sector is currently witnessing a rebound in its fundamentals, especially in the domains of computing, communication, and mediaSecondly, institutional investors have conspicuously low holdings in the TMT sector, especially within semiconductors

Lastly, new trends within the industry, such as the prevalent adoption of AI applications, may act as a core driver for solidifying the TMT sector’s renewed status.

Amidst speculations on whether this TMT resurgence is merely a transitional phase or an initiation of broader shifts, Zheshang Securities argues that the cycle repeats every decade, suggesting that AI will drive substantial transformations across TMTIn a similar vein, Xinyi Securities emphasizes the significance of sentiment indicators tied to trading volumes, which traditionally align with more stable industries, hinting that any substantial disruptions within the sector could lead to significant shifts away from entrenched trading patterns.

In summary, despite the overarching cautions, there remains a prevailing sense of hope and momentum surrounding the TMT sectorAs the narrative unfolds, investors must juggle their predictions in a rapidly evolving technological landscape, keeping their eyes peeled for emerging trends while weighing the inherent risks involved.