In a recent discussion, Chen Guo, Deputy Head of the Research Institute and Chief Strategist at East Money Securities, shared his outlook on the A-share market for the second half of the year. He addressed the recent market adjustments and his expectations for a recovery and sector rebalancing. Key points are summarized below.
Understanding the Recent Market Downturn
Regarding the recent market decline, Chen Guo believes it is primarily triggered by overseas market volatility, especially related to the AI industry and Federal Reserve policy expectations. For China's stock market, this does not constitute a systemic risk. While it may impact sectors highly correlated with U.S. AI stocks, for the majority of A-shares, the effect is more about sentiment transmission. The broad-based adjustment seen in the market is not expected to last long. Initial sentiment-driven declines will gradually stabilize, leading to market differentiation. If there is new positive progress in U.S. AI, related sectors will rebound significantly. Even without such progress, other sectors are expected to stabilize quickly and then develop trends based on their own fundamentals.
Potential for a Rebound in Undervalued Stocks
Chen points out that many A-share stocks performed weakly or declined significantly in the first half of the year. While some of this was related to fundamentals, a significant portion, or even the majority, was not fundamentally justified, indicating potential mispricing. He expects a subsequent recovery for these stocks. This recovery could be catalyzed by two factors: a correction of overly pessimistic expectations towards the "carbon-based" (traditional) economy as data improves, and a marginal improvement in capital inflows, including share buybacks and insider purchases by companies, particularly in traditional sectors.
Outlook for the Third Quarter
Looking ahead to the second half, especially the third quarter, Chen Guo sees marginal improvements in both economic expectations and capital inflows. Downside risk is seen as limited, while continued marginal improvement creates upside potential. The market may experience a volatile but upward-trending pattern. The market structure is also expected to differ from the second quarter, moving towards further rebalancing. In simple terms, the third quarter presents limited downside but greater upside potential, with a further rebalancing of market structure.
Reassessing the Silicon vs. Carbon Economy
Chen Guo argues that market expectations from March to early June were too extreme, creating a K-shaped divergence. Expectations for the "silicon-based" economy, especially the U.S. AI capital expenditure chain, became overly crowded and potentially overvalued, making it difficult to exceed expectations. Conversely, expectations for China's "carbon-based" economy were extrapolated too pessimistically. Subsequent data will lead to corrections in both expectations and fundamentals, driving a rebalancing. Specifically, the outlook for U.S. AI may be less optimistic than previously thought, while expectations for China's AI and carbon-based economy should be revised upward. China's AI path focuses on cost-effectiveness and commercialization, with a higher probability of returns on investment. Therefore, a rebalancing among U.S. AI, China AI, and China's carbon-based economy directions is anticipated.
Sectors to Watch in the Second Half
Regarding sectors that may perform in the second half, Chen Guo highlights traditional industries where companies are actively conducting share buybacks and insider purchases. He also points to sectors like consumer staples (e.g., food), healthcare (e.g., CXO), coal, power equipment & new energy, non-bank financials, new consumption, internet, and semiconductor equipment/materials/domestic AI chains. Thematic directions include blue-chip companies with active buyback programs. He specifically notes that sectors like traditional and new energy (e.g., coal, lithium batteries, energy storage) and non-bank financials, which have solid earnings growth, are likely to see performance in the second half as the investment environment differs from the first half.
Diverging Paths for AI: China vs. the U.S.
Chen Guo explains the core differences between Chinese and U.S. AI development. The U.S. model emphasizes AI agents for labor substitution, which carries high costs and social challenges, and its profitability remains unproven. China's model focuses on using AI as a tool to benefit the "carbon-based" economy, aiming for widespread, cost-effective adoption. This approach is seen as more sustainable and harmonious. While U.S. models still hold a technical lead, China's top models are competitive and offer much better cost-performance, posing a challenge to U.S. AI's high-cost model.
Selecting AI Investment Opportunities
On investing in the AI industrial chain, Chen Guo advises a discerning approach. For short-term trading, one can focus on segments with tight supply-demand dynamics, but must assess valuation reasonableness and exit timing. For allocation, look for segments where supply is concentrated among very few companies with high entry barriers. Companies with experience weathering industry cycles are preferable. Furthermore, from a medium-term perspective, investment in AI should not be limited to the upstream; significant opportunities also exist in the application layer, even if not the current market darling.
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