Summary of Key Points
This week, both A-share markets and overseas tech stocks experienced significant declines, particularly in sectors such as AI computing power and semiconductors, which had seen rapid gains earlier on. The small and mid-cap indices recorded the highest losses in nearly a decade; however, broad-based index funds (ETFs) saw their largest weekly inflow of capital ever, indicating that long-term investors are taking advantage of the market downturn to buy into assets at lower prices. Institutions believe that this decline is due to "structural deleveraging" within the tech sector—those who borrowed money to invest in stocks were forced to sell. It is not a crisis affecting the entire market, and the subsequent adjustment will be limited. The market is expected to diverge, with some sectors bottoming out while others continue to decline. The tech trend will not end, but it will shift from widespread gains to a focus on companies with solid performance.
Who Fared Worst?
This week, almost all A-share stocks declined, but there were clear patterns: small-cap stocks fell more than large-cap ones, and growth stocks suffered more than value stocks:
- Index Performance: The ChiNext index dropped 10.78% (the largest decline in nearly a decade), the CSI 500 (small and mid-cap) fell 11.67% (the highest decline in nearly a decade), the CSI 1000 fell 12.57% (second-highest decline in nearly a decade), and the STAR 50 index also saw significant adjustments. These declines have surpassed those during the bear market of 2018 and other major corrections in 2024, indicating that short-term risks have been largely mitigated.
- Sector Performance: Tech sectors such as AI computing power, semiconductors, and optical communications led the decline, with leading stocks retracting by 30% to 50% from their June highs. For example, Puran Technology, a company in the memory chip sector, fell 52.96%, Hengtong Optoelectronics (fiber optics) fell more than 50%, and Liantech Technology (optical modules) fell 46%. In contrast, "stable" sectors such as banks, utilities, and high-dividend stocks were less affected, reflecting a pattern of growth stocks shedding excess valuation while value stocks providing support.
Why the Decline?
The decline was not unique to A-shares; it was a global phenomenon affecting tech stocks. There are two main reasons:
1. Common Pressure on Global Tech Stocks: Overseas giants like Samsung and SK Hynix also experienced significant losses, and markets in Japan and South Korea saw increased volatility due to leveraged trading. The main issue is a change in market expectations regarding AI hardware investment—there was previously optimism that companies would heavily invest in AI equipment (increasing capital expenditure), but now there are doubts about the sustainability of these investments, leading to valuations being adjusted downward.
2. Leverage Impact on A-share Tech Stocks: Tech stocks had risen sharply earlier on, with many investors borrowing money to buy them. When prices dropped, it triggered a chain reaction: declining stock prices → insufficient collateral in financing accounts → forced liquidations by brokers (selling stocks to repay loans) → further price declines → more liquidations. On July 17, over 200 stocks hit the daily limit down, with tech sectors selling for a total of 250 billion yuan, reflecting a panic-driven wave of forced liquidations.
However, institutions emphasize that this is not a systemic leverage crisis like the one in 2015, as the funds borrowed for stock investing were mainly concentrated in the tech sector, and there are fewer leveraged positions in value stocks, so a full-scale market collapse is unlikely.
Where Is the Money Going?
Despite the market panic, large amounts of capital are flowing into broad-based ETFs, indicating that long-term investors are buying into assets at lower prices:
- This week, equity ETFs saw a net inflow of 203.7 billion yuan, setting a new record high! ETFs targeting indices like the CSI 300 and CSI 1000 received the most capital. For example, the Huatai-PineBridge CSI 300 ETF saw a one-day inflow of 21.4 billion yuan, approaching a scale of 100 billion yuan.
What does this mean? Long-term investors (such as institutions and social security funds) believe that the market has corrected sufficiently and see this as an opportunity to buy into core indices. This capital inflow could change the market structure in the third quarter, moving away from a tech-dominated market towards a more balanced allocation.
What Will Happen Next?
The potential for further declines is limited, and the market is likely to consolidate at lower levels:
- Signs of Bottoming Out: According to Li Haoyang from China Merchants Securities, the process of liquidating leveraged positions is nearing its end, and future selling pressure will diminish. Three signals are needed to confirm a bottoming out: a slowdown in the decline of financing balances, a stabilization of leading tech stocks, and positive industry developments that can drive stock prices back up.
- Market Recovery: The recovery will not be a V-shaped rebound but rather a process of divergence, with performance-driven sectors (like tech with solid fundamentals) gradually recovering, while others continue to decline. The overall trend in the tech sector remains intact, although there are concerns about short-term investment prospects for AI hardware.
How Should You Invest?
Institutions suggest two main investment strategies:
1. Based on Mid-Year Reports and Performance: Look for sectors that performed well or have seen improvement in earnings, such as TMT companies (e.g., those in memory chips), resource industries (improved supply and demand, rising prices and volumes), and export-related sectors (batteries, medical devices, innovative drugs).
2. Focus on Industry Trends: Within the tech sector, identify "scarce" components or technologies with high growth potential, such as HBM (high-end storage), advanced packaging, and high-speed optical interconnects. Additionally, focus on domestic solutions in computing power (self-sufficiency, compatible domestic models and hardware).
In summary, the tech market will not end, but investors need to be selective, focusing on companies with solid fundamentals. The market may experience short-term volatility, but long-term opportunities still exist.
By breaking down complex financial news into these clear points, it becomes easier for non-professionals to understand the situation. The key takeaway is that the tech sector's decline is due to leverage and changing market expectations, but it is not a crisis affecting the entire market. By identifying the right sectors and investments, investors can still profit from the current market conditions.