After a span of ten years, the TMT (Technology, Media, and Telecommunications) sector is experiencing another surge, driven largely by advancements in artificial intelligence (AI) and the digital economyIn recent weeks, a notable influx of capital has flowed into the TMT sector on the A-share market, with reported statistics from Minsheng Securities illustrating that the trading volume of the computer industry has consistently remained above 90% of its historical percentile for the last eight weeks.

To provide some context, it's important to understand that since 2016, the TMT sector's trading volume has typically maintained an average of above 90% for only four to five weeks at a timeThis latest structural evolution in market dynamics has transformed the TMT sector from an 'underweighted' entity among institutional investors to a frenzied trading hub within just two months.

Many institutional investors may feel as though they have missed out on the significant price movements that began in early February regarding TMT stocks

According to Minsheng's latest report, the Wind TMT index rose by over 15% between the end of January and March 24, while the median net value of all equity funds dropped by 2.5%. Surprisingly, even the top-performing 10% of equity funds in that timeframe only saw a median net value increase of 7.7%.

What we are witnessing in the current trading landscape appears more like a frantic effort to compensate for prior missed opportunities rather than a reflection of stable market conditionsThe rapid ascent of TMT stocks has split the market into two camps: optimistic investors who believe TMT is establishing itself as the new mainline focus for A-shares, and cautious investors who warn of potential risks lurking beneath the surface amid extreme overcrowding in the trading environment.

As discussions about TMT stocks proliferate, prominent fund managers like Cai Songsong are making bold moves

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As of March 27, reports show that the fund he manages, Nuoan Active Return, has achieved an impressive year-to-date return exceeding 50%, placing it at the top among actively managed equity fundsInvestors have fondly noted that "Manager Cai" remains as proficient as ever in orchestrating profitable outcomes.

To illustrate, the outstanding performance of Nuoan Active Return stems from its dramatic transformation: Cai took over this mini-fund with a size of less than 100 million CNY on August 20, 2022, and quickly shifted its portfolio focus from consumer staples and finance to semiconductors and innovations in AILast year's quarterly report reflected his anticipation of a crucial turning point for the technology and semiconductor sectors, urging a proactive stance to prepare for the impending technology upswing.

The market indeed followed his predictionsNuoan Active Return's success has inspired several other funds, such as Guoxin Guozheng Xinxiu and Tianzhi Research-Driven, to also achieve growth of over 40% in the same period by heavily investing in the TMT sector

Despite the exceptional portfolio styles, a common trait among these funds is their relatively small size, leading to substantial profits for a select few investors, while the majority do not see such gains.

While many fund managers recognize the potential of TMT, their investment timing has left room for improvementFor example, Li Bin from HSBC Jintrust emphasized during a recent roadshow that they recognized the A-share market as offering robust investment opportunities from early in the year, pinpointing TMT as a primary focusHowever, he candidly admitted that they underestimated the pace, magnitude, and sustainability of the subsequent rally following the Lunar New Year.

The rise of the TMT sector has also triggered cautionGuojin Securities noted that the current trading momentum in TMT suggests a squeezing effect on other market segmentsThey have pointed out that, as TMT trading heats up, there is a clear consequence on sectors like new energy and consumption where capital appears to be siphoning away.

As investors weigh their options, the dilemma remains: should they dive in or remain on the sidelines? Are we establishing a firm new main line in investments, or should one be alert to the potential for a rush for the exits? These contrasting viewpoints epitomize the current state of division surrounding the TMT sector.

Li Bei, the founder of Banxia Investment, stands among the few fund managers openly warning of risks

She stated at an investment summit that the current fervor surrounding AI stocks has surged to an exaggerated level that is unhealthy for the marketIn her analysis, while AI presents a significant trend and starting point, it is unrealistic to expect a one-month performance to reflect 20 years of evolutionOn March 23, AI-related stocks constituted nearly half of the total trading volume on the A-share market, which raised her eyebrows.

Likewise, a report from Zhongtai Securities echoed similar sentiments, cautioning about the heightened trading intensity in TMT nearing a three-year peak, suggesting that risks could be lurking in the crowded trading conditionsThey posited that, given the current state of the TMT sector, a substantial recovery akin to that seen during 2014-2015 may not be imminent due to limited fundamental support for AI-related themes within Chinese listed companies.

The concern is palpable: when the trading volume of a sector reaches a peak, it often becomes desensitized to positive developments while becoming overly responsive to negative news

Tianfeng Securities shares insights projecting that the current tradeability of TMT stocks may declineThey advocate caution for short-term investors as potential catalysts and improvements in fundamental outlooks will be paramount for future gains.

Despite these concerns, there remains a robust contingent of optimistsGuojin Securities’s report clarifies that TMT possesses all attributes necessary to emerge as the dominant investment theme over the next two to three yearsThey cite fundamental recovery, low institutional allocation in TMT, and emergent industry trends as essential components fueling this potential.

Evidently, the past surges in new mainlines have coincided with phases of fundamental recoveryThe TMT sector's fundamentals are currently showing signs of improvement, especially in computing, communications, and media, with semiconductors achieving a slightly lagging recovery.

Moreover, historically every iteration of a new main line has surfaced during periods of low institutional investment in the TMT space; the current public investment landscape indicates that institutional investors have largely underexposed themselves to TMT.

This commentary brings to light the continual evolution of the market and the ongoing emergence of new trends