Summary of Key Points
This is a conversation between David Wong and investment professional Ricky, discussing the market review for the first half of the year, the impact of AI narratives on the economies of China and the United States, the valuation risks associated with the AI industry chain, and investment strategies for the second half of the year. The main points are as follows:
- The market showed extreme divergence in the first half of the year: A-shares rebounded thanks to AI, while Hong Kong stocks were sluggish; Japanese and Korean stocks, as well as U.S. stocks driven by AI, performed well.
- AI has had a more significant positive impact on the U.S. economy, benefiting both investment and consumption. In China, however, the economy is mainly supported by AI exports despite weak domestic demand.
- Current AI valuations already reflect current profit expectations, but the future will depend on long-term factors such as labor substitution.
- For the second half of the year, a "dumbbell" investment strategy is recommended, focusing on both peripheral and midstream sectors related to AI. Ordinary investors should control their positions and maintain a cash reserve.
Market Performance in the First Half of the Year: A Polar Opposite Situation, with AI as the Main Driver
The global market experienced significant divergence:
- A-shares: Rose sharply in the first quarter but then declined; the CSI 300 rose by 7.5% (with the second quarter contributing 11.9%) and the ChiNext index rose by 36.4% (the entire increase coming from the second quarter). However, most stocks did not perform well.
- Hong Kong stocks: Fell sharply, with the Hang Seng Index dropping by 10.7% and the Hang Seng Tech Index falling by 18.9%, mainly due to declines in value stocks (banks and state-owned enterprises).
- Japanese and Korean stocks, as well as U.S. stocks: Saw strong gains driven by AI; the KOSPI doubled in the first half of the year (up 68%) and the Nikkei 225 rose by 40% (Kawasaki surpassed Toyota to become Japan's largest company by market value). The S&P 500 in the U.S. rose by 9.6%, and the Nasdaq rose by 12.8%, with seven giants (such as Nvidia and Microsoft) making a comeback.
- Other assets: Gold fell by 7.2% (14% in the second quarter), oil rose by 21.96% but then declined; the U.S. dollar strengthened (the RMB appreciated to 6.79 against the USD).
In short, AI was the driving force in the market during the first half of the year. Those not involved in AI-related sectors either did not profit or suffered significant losses.
The Impact of AI on China and the United States
The impact of AI on the two economies is quite different:
- United States: AI acts as an accelerator:
- Investment: Large companies are investing heavily in AI infrastructure (capital expenditure accounts for nearly 6% of GDP, similar to the rail revolution in the 19th century), boosting industries such as data centers and chips.
- Consumption: Rising stock prices have increased wealth (33% of U.S. household wealth is in stocks, a record high), leading to stronger consumer spending, especially among the top 10% of the population.
- Challenges: However, AI may replace jobs for coders and white-collar workers, and high interest rates increase the risk of companies borrowing for investment.
- China: AI is a lifeline but has not fully rescued the economy:
- Exports: AI-related product exports increased significantly (integrated circuit exports rose by 110.9%, mainly due to price increases rather than volume growth), contributing 49% to export growth.
- Domestic demand: Weak consumption (retail sales fell for the first time in May, and consumer loans shrank by 10% in the short term); there is significant employment pressure (the proportion of the agricultural population returning to rural areas).
- Divergence: Only the AI sector is experiencing inflation, while other sectors are in deflation, creating a K-shaped pattern where AI companies profit greatly, but ordinary people do not feel the benefits.
AI Valuations: Are They High Now?
Current AI stock valuations already account for all foreseeable profits:
- Current logic: The market assumes that AI will replace coding jobs and general office work (Microsoft, Adobe), with a potential market size of $200-300 billion, which is reflected in stock prices. For example, the stock price of Hynix implies a 40% peak profit margin that may not be sustainable.
- Future logic: If AI replaces white-collar workers (about 1.2 billion people), the market size could reach $50 trillion, but this will take time and depend on product improvement and social acceptance, as well as addressing employment issues (e.g., autonomous vehicles replacing drivers).
- Risks: Volatility in AI stocks is likely to increase; if large companies announce plans to produce their own chips or reduce capital spending, stock prices could plummet due to differing future expectations.
In short, buying core AI stocks now is like investing in "the future cake," but the cake is not yet baked and could fall at any time.
Investment Strategies for the Second Half of the Year: A Dumbbell Approach to Mitigate Volatility
Ricky and David Wong recommend the following strategy:
- Asset allocation: In the short term (third quarter), U.S. stocks > A-shares > Hong Kong stocks (AI trends may continue), but be prepared for potential changes.
- Dumbbell layout:
- Peripheral AI sectors (e.g., optical modules, PCB-related sub-sectors) or domestic alternatives (such as Huawei and DeepSeek's industry chain).
- Midstream sectors on the left side of the curve (e.g., excavators, chemicals, which have hit bottom in terms of price and volume and are waiting for catalysts to drive further growth).
- Other assets:
- Gold: Used as a risk hedge (a small portion of the portfolio), but with a long-term downward trend.
- Crude oil: Underestimated in price but difficult to predict; no clear direction.
- Copper: Promising due to its use in data center connections.
- Government bonds: Limited returns.
- Hong Kong internet stocks: Can be considered for purchase, but choose the leaders.
In summary, do not focus all your investments on core AI sectors; diversify and maintain a cash reserve.
Advice for Ordinary Investors
Here are practical recommendations for ordinary investors:
1. Avoid hot topics: The risk-reward ratio of core AI stocks is currently unsuitable; chasing trends can lead to losses.
2. Control positions: Do not invest too heavily in individual stocks; consider index funds for diversification.
3. Maintain a cash reserve: For the first time, David Wong emphasizes the importance of keeping cash on hand; volatility will be high in the second half of the year, and cash can help you buy at lower prices or as a hedge.
4. Look for opportunities in midstream sectors (e.g., excavators, chemicals) or innovative drugs in Hong Kong stocks (the rise of Chinese pharmaceutical companies is a trend; choose the leaders).
5. Stay calm: The bull market will not end soon; it's okay to miss this opportunity; wait for the next one.
Finally, remember that strategies change over time. Don't rush into markets when they are popular—those times are often at the bottom of the cycle.
The essence of this conversation is that while AI is the future, we need to remain cautious now, recognizing both long-term risks and opportunities. For ordinary investors, surviving the market fluctuations is more important than making quick profits.