This week's market has been characterized by a volatile, consolidating trend. The recent sharp decline in A-share tech stocks has been exacerbated by a cascading crash in the South Korean stock market, where the Korea Composite Stock Price Index triggered multiple circuit breakers.
Tech stocks staged a rebound on Wednesday, lifting all major Shanghai and Shenzhen indexes back into positive territory. This sustained sell-off has begun to attract some bargain-hunting capital. The South Korean market had previously experienced a wave of leveraged trading by retail investors, a risk that had been flagged. The subsequent violent boom-and-bust cycle there signaled the approach of a crash-style decline. Currently, the Seoul Composite Index has fallen roughly 40% from its peak, with major stocks like Samsung and SK Hynix nearly halved in value, triggering forced liquidations for many heavily leveraged investors.
Investors have been repeatedly advised to reduce leverage, cut positions, diversify asset allocation, and avoid concentrating bets on a single sector. Leverage amplifies losses during market corrections, making it difficult for investors to withstand deep drawdowns. During the current A-share downturn, some leveraged investors have already experienced forced liquidations. Historical lessons from a decade ago are relevant, reinforcing the need to reduce leverage. Without leverage, even a fully invested portfolio can recover from a severe drawdown, as high-quality holdings have the potential to rebound over the long term. However, adding leverage may prevent investors from holding on until the market recovers.
The shift in market style currently underway aligns with earlier predictions. The market performance in the first half of 2026 was extreme, with capital flooding into a few hot sectors, accumulating significant risk. This situation can easily lead to the unwinding of crowded trades, triggering deep corrections, a pattern the market has recently confirmed. At one point, the top 5% of stocks accounted for 50% of total market turnover, a clear sign of overcrowding. After this period of adjustment, profit-taking pressure in these sectors has significantly eased, suggesting the correction cycle for tech stocks may be nearing its end.
Since returning from the Berkshire Hathaway shareholder meeting in May, caution has been advised. The recommendation was to avoid the risk of large drawdowns from concentrated single-sector holdings, reduce leverage, cut positions, and balance allocations between tech and dividend-yielding sectors to counter greed ahead of a potential market rout. The market is now entering a phase of rational allocation. Tech companies with stable earnings and industry leadership have room for a recovery rally. Investors who did not reduce their positions at the top and hold shares without leverage can hold for the long term, waiting for the next cycle. High-quality tech leaders have the potential to reach new highs again. However, tech stocks relying solely on themes and concepts have limited recovery potential. The risk of a sector bubble bursting was previously warned about. Now, with the prices of some leading tech stocks nearly halved, the bubble has largely been deflated, making it a time for rational allocation.
As the market environment changes, investment strategies must adapt. Investors should turn optimistic during deep market declines, as the current cycle does not show signs of transitioning into a bear market. Technological innovation remains a key beneficiary of economic transformation. The next step is to wait for the market to complete its bottoming process and usher in a new uptrend.
On the macroeconomic front, China's economy is in a critical period of transformation and upgrading. Traditional economic sectors are showing weak sentiment, with a notable decline in consumption growth. However, high-tech industries and advanced manufacturing are maintaining rapid development, offering vast long-term growth potential for new productive forces. Exports grew by a double-digit percentage in 2026, becoming a core driver of the economic recovery. The domestic economy is expected to maintain its recovery trend in the second half of the year, with high-quality development continuing to advance. The core driver of this economic recovery comes from new productive forces spurred by technological innovation, laying the foundation for a new rally in the tech sector.
In the domestic chip and semiconductor sector, breakthroughs have been achieved in memory chip technology. The leading memory chip company has gone public and now tops the market capitalization list, far ahead of its peers. This reflects strong capital market confidence in the development of China's memory chip industry. Simultaneously, China has made technological breakthroughs in large language models and advanced lithography machines. Projects in advanced manufacturing, such as humanoid robots, are gradually being implemented. In this current AI technology competition cycle, China and the US are developing in parallel, with no evidence of a widening gap. The long-term logic of the AI tech industry is solid. The previous concentration of capital pushed stock prices too high, creating an asset bubble. With the bubble deflated, the market now presents a window for bargain hunting.
The recent significant rise in the Hang Seng Index and the Hang Seng Tech Index is a manifestation of the market style shift during the tech sector's adjustment. Previously depressed consumer and internet tech stocks have seen significant price increases. The continuous strength of a single sector is unsustainable. Sector rotation is a hallmark of a healthy market, and the current market is showing signs of this rotation. The Hang Seng Index and Hang Seng Tech Index have the potential for continued strength. The current focus is on waiting for the tech stock bubble to fully deflate, gradually setting the stage for a new rally. The key indicator to watch is the progress of de-leveraging in the South Korean stock market. If the Seoul Composite Index stops falling and begins a significant rebound, it could be a catalyst for an A-share tech stock rally.
Furthermore, the trend of US tech leaders must be monitored. The current AI tech rally originated in the Nasdaq market, which has been in an uptrend for years. The market is now divided on the massive capital expenditure plans of AI tech giants, which is a core trigger for the recent correction in US tech stocks. While high capital expenditure can boost orders and earnings for chip companies in the short term, a simultaneous reduction in spending by these giants could trigger a cascading sell-off. The future performance of the Nasdaq and the seven major tech leaders is a key risk indicator. The increased short-selling activity by prominent bearish institutions against these seven major stocks is a warning signal. During the investment process, it is crucial to continuously track volatility in the US, Japanese, and South Korean markets, with a focus on the US market. Positions should be adjusted dynamically to avoid asset bubbles and reduce frequent trading. Investment opportunities should be pursued based on medium-to-long-term industrial logic, as the long-term tech sector rally is sustainable and offers a window for allocation.
Emerging industries like AI, semiconductors, and humanoid robots are core sectors of this AI tech revolution. Over the long term, these tech innovation sectors play a key role in driving China's economic transformation and capital market development. Over the past year, capital has been concentrated in semiconductors and computing power/algorithm stocks. The earlier excessive price appreciation led to a deep correction, but after this adjustment, high-quality leading stocks are gradually becoming attractive for value investing. The humanoid robot sector is a long-term growth industry. It has recently experienced a significant correction due to a delay in the launch of a new robot by Elon Musk's company and the broader tech sector downturn. Over the medium-to-long term, the development logic of the humanoid robot industry remains unchanged. It is a long-cycle growth industry. Domestic production capacity for humanoid robots is expected to reach 100,000 units in 2026, with a substantial increase in output in 2027. Large-scale production is progressing, and after the deep correction, this sector is gradually showing allocation value. China's manufacturing industry has advantages of low costs and a complete supply chain. The technology gap in humanoid robots with the US is relatively small. Combined with strong domestic demand, the long-term development space for the industry is ample. This decline was not caused by a deterioration of industry fundamentals but by market sentiment, so there is no need for excessive pessimism. After large-scale production of humanoid robots begins, the orders and earnings of leading companies will gradually materialize.
The significant short-term volatility in the US, Japanese, and South Korean stock markets has created an external shock for the A-share market adjustment. The Federal Reserve is about to announce its latest monetary policy. The Fed's policy-making is currently in a dilemma. Aggressive rate hikes risk bursting the AI tech bubble in the US stock market, which could negatively impact the November elections. Therefore, the Fed is unlikely to raise rates sharply in the short term. However, if it cuts rates, inflation could face renewed upward pressure. Geopolitical tensions in the Middle East persist, with shipping through the Strait of Hormuz restricted, causing a sharp rise in international oil prices. Geopolitical risks are strengthening the US dollar, and higher oil prices are raising US inflation expectations. The probability of the Fed keeping rates unchanged at its July meeting is high, and the market's expectation for a 25 basis point rate hike is below 40%. The new Fed Chair, John Warsh, is presiding over this meeting, and the policy decision is forthcoming. The current federal funds rate target range is 3.5% to 3.75%. The new chair faces market expectations of a policy divergence, putting pressure on decision-making. The market awaits the Fed's decision, as external volatility poses a potential shock to domestic asset prices, requiring continued attention.
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