Summary of Key Points
The recent adjustment in the A-share market is a release of risks following the previous period of growth, and it does not represent a reversal in the medium-term trend. The process of deleveraging is nearing its end, and positive factors are beginning to accumulate, suggesting that a "slow bull market" is likely to continue in the second half of the year. The market will move away from the single focus on AI in the first half and will see rotation among various sectors. While AI remains a significant area of interest, opportunities are expanding beyond AI-related sectors. Corporate earnings are showing improvement, and the growth-oriented style of investing is still favored, but a balanced allocation is necessary. Specific sectors to watch include domestic computing power and storage technologies.
Detailed Analysis
1. The Adjustment Is Not a "Bear Market"; It's Just a Risk Release and Deleveraging
The recent decline in the A-share market is not a trend reversal but a normal cooling down after excessive growth. According to UBS, the July adjustment was mainly driven by three factors:
1. The momentum around AI has temporarily slowed down, as there are concerns about the profit-making models of large American models.
2. Many investors who made quick profits want to cash out, leading to a collective sell-off.
3. There were too many investors using leverage to trade stocks, which caused prices to fall as leverage was reduced.
These issues are now improving:
- Leverage levels have returned to a more reasonable range (for example, the balance of margin financing has dropped to levels seen at the beginning of the year or in April/May).
- The AI ecosystem is also showing signs of improvement, with American software companies collaborating with large models to generate profits, and related indices have rebounded.
- Stock price volatility has decreased, and valuations have returned to a more reasonable range. Therefore, this adjustment is more of a "cleaning" process rather than the start of a bear market, and the slow bull market can continue.
2. The Second Half of the Year Will See Diversified Market Performance, Not Just AI
In the first half of the year, funds were concentrated in the AI sector, but in the second half, they will spread across a wider range of sectors. The reasons are simple:
- Public funds have already invested heavily in AI and cannot increase their positions further.
- Insurance companies prefer sectors with high dividend yields, such as banks.
- Individual investors are diversifying their investments, often choosing broad-based ETFs that may not focus solely on AI.
Although AI remains a long-term focus, there is no clear next major growth driver (the strongest current application of AI is in programming, where penetration is already high, and large companies are starting to control IT costs). As a result, investors will look for other opportunities, such as high-dividend stocks, companies with overseas operations, and industrial sectors, which could see gains.
3. Improving Corporate Earnings Are Supporting the Market
Mid-year reports show a significant increase in A-share earnings: earnings grew by 8.5% in the first quarter and jumped to over 30% in the second quarter. The improvement was driven by non-financial companies (such as technology and materials) in the first quarter, and even the financial sector performed well in the second quarter due to the active stock market and increased profits for securities firms.
There are two main reasons for this improvement:
1. Corporate revenues have recovered, and
2. Profit margins have increased (anti-competition policies have reduced the need for price wars, and the proportion of overseas revenues is also rising). It is expected that A-share earnings will grow by 15% by 2026 (compared to just 3% last year), which will provide support for the market.
4. Allocation Recommendations: Growth-Oriented Investing, but with Balance
- Style: The growth-oriented style (technology, emerging industries) remains a long-term focus, but a balanced allocation between large and small-cap stocks is advised.
- Specific Areas to Watch:
- Domestic Computing Power: There is a trend of replacing imported semiconductor equipment with domestic products, and many tech companies are expanding production capacity after raising funds.
- Storage: AI requires large amounts of storage, and the industry is dominated by just four global giants, creating favorable conditions for investors.
- Connectors: These are essential components for AI devices, and demand is expected to increase.
- High Dividends: Value sectors like banks are favored by insurance funds.
- Consumption: Investors should wait until wages rise and housing prices stabilize before making investments in the consumer sector.
5. Limited Impact from External Factors; Focus on Domestic Funds and Earnings
Chinese tech stocks are affected by global AI developments (such as American large models), but the A-share market is less closely linked to overseas markets due to the low proportion of foreign capital. The performance of the A-share market is mainly determined by domestic factors, such as insurance funds, individual investor behavior, and corporate earnings. Therefore, there is no need to worry too much about fluctuations in overseas markets; the focus should be on domestic policies and corporate profitability.
Overall, the A-share market in the second half of the year will not be dominated by a single sector like it was in the first half. The slow bull market will continue, and diversified sector rotation will create more investment opportunities. As long as investors choose the right sectors and maintain a balanced allocation, they can capitalize on the market gains.