A strategic review of market data indicates that a warning issued in early May regarding a "summer breeze" of global equity market corrections has been validated by recent macroeconomic and capital market shifts. The escalation of the US-Iran conflict has driven oil prices and inflation concerns higher, with the 10-year US Treasury yield rising 13 basis points to 4.68%, a new high for the Trump 2.0 term, driven primarily by real interest rates. The US dollar index remained strong, closing near 101.5.
Market Outlook: The Aftermath of the Summer Breeze Persists, Overseas Risks Force a Turning Point
First, from a macro-funding perspective, focus remains on Middle East geopolitics, oil prices, US Treasury yields, and the US dollar. The deterioration of the Middle East situation is the root cause of recent macro-funding risks, with a potential turning point for global capital markets expected around mid-August. A necessary condition for a true short-term recovery is increased adjustment pressure on US capital markets, which would force the Trump administration to re-implement a ceasefire mechanism and reopen the Strait of Hormuz.
Before the July 28-29 FOMC meeting, oil prices and inflation risks could still increase upward pressure on US Treasury yields, further dragging down US stocks and accelerating financial conditions tightening, prompting Trump to once again push for a significant drop in oil prices.
Second, from a micro-funding perspective, the backlash from the extreme crowding and leveraged trading in the global AI rally in the first half of the year is the core variable driving the "summer breeze" global equity market correction. The source of this global stock market deleveraging storm is the Korean stock market. With a recent short-term rebound, Korean regulators have accelerated active deleveraging measures from an original date of August 5 to July 31. Therefore, heightened vigilance is needed for a new round of "deleveraging" risks in the Korean market at the end of July and early August, particularly its potential to trigger a backlash stampede in crowded trades, causing a "wildfire" of volatility and crash-like risks in overseas markets like Japan, Taiwan, and the US. While the total size of 16 single-stock leveraged ETFs in Korea has significantly decreased from its peak, dropping to 10.7 trillion Korean won on July 23 (a 35.6% decline), the reduction is mainly due to net asset value declines. Crucially, the current size remains well above the 4-5 trillion Korean won stable level calculated by regulators.
Third, in the short term, micro-funding also requires vigilance against high volatility caused by the active or passive contraction of quantitative trading. The biggest change in major global stock markets over the past few years has been the advent of the AI era and the increasing dominance of quantitative funds in trading, which has played a role in amplifying structural crowding beyond historical norms. The overall positions of active investment managers in China, the US, and Japan remain high, and the extreme crowding of AI stocks, particularly in the TMT sector, has not significantly improved. If quantitative trading leads to a rapid correction in hard-core assets, it could paradoxically present an opportunity, allowing for a contrarian, fundamentals-based positioning.
Fourth, the release of fundamental risks still requires time. This correction is not just a "denominator-side" shock to liquidity and risk appetite but has also begun to affect the "numerator-side" of earnings, capital expenditure, and industry profit distribution. Investors are beginning to question the old logic of the AI rally, causing a lack of sustained rebound in tech stocks. Starting at the end of July, the concentrated earnings reports from US tech giants will also be a period of pain and volatility as the market transitions from old to new fundamental logic.
The current old logic of the AI industry chain, "brute force creates miracles," is facing a "prisoner's dilemma" among upstream and downstream players. Recent post-earnings declines in Alphabet and Tesla show that overseas markets are shifting from the old logic of "chasing AI capital expenditure expansion" to concerns about the erosion of free cash flow and valuation due to high spending. A negative feedback loop of "rising capital expenditure - cash flow pressure - valuation downgrade - further tech sector deleveraging" is beginning to impact the market.
The subsequent fundamental turnaround will involve "finding and establishing a new logic" for the market, which could come from new, above-expectation progress in AI application demand and commercialization revenue, or from a shift in industry logic from being dominated by memory price increases to a rebalancing of profit distribution between upstream and downstream.
Finally, regarding new logic for China's fundamentals, attention should be paid to the Politburo meeting at the end of July, which will outline the deployment and arrangements for the second half of the year's economic work.
Investment Strategy: Left-Side Positioning for the Autumn Rally, Sowing in Tears
Looking ahead to the next few weeks, major global stock markets will remain in the aftermath phase of the "summer breeze." Historically, this phase of a major market correction often causes ordinary investors to fall into pessimism, leading to panic selling, and forces leveraged traders into margin calls. In the current round of the "summer breeze" adjustment, we still warn that the backlash from first-half leveraged and crowded trades retains its momentum.
However, as short-term risks are further released, particularly as overseas risks are expected to gradually transform from a source of shock into a catalyst for market bottoming, opportunities may arise. On one hand, after the release of risks such as the US-Iran conflict, high US bond yields, and the second round of Korean regulatory deleveraging, a turning point could emerge as early as the first half of August. On the other hand, the fundamentals in the second half of the year also have the potential to turn around, eventually leading to new demand expansion or a new sustainable development logic for the AI industry chain.
We hold a strategic bullish view on the hard-core assets of A-shares and Hong Kong stocks. We reiterate that our consistent "summer breeze" warning, which has been bearish on short-term global stock markets in June, July, and up to mid-August, does not contradict our long-term conviction in the current AI-tech-driven Juglar cycle, nor does it conflict with our bullish view on Chinese stock market hard-core assets.
On a tactical level, Chinese stock markets offer better value compared to overseas markets. A-shares and Hong Kong stocks have already released some risks in advance, having corrected first since mid-May. The recent simultaneous contraction in volatility and trading volume suggests that the market has largely confirmed a bottoming area and is entering a phase of low-volume grinding and consolidation. While stricter programmatic trading regulations and the potential listing of Changxin Technology may cause short-term emotional fluctuations and structural shocks, they will not change the medium-term prosperity trend.
We believe the current correction is a strategic window for positioning that appears risky but is actually an opportunity. Chinese stock markets are gradually entering a left-side window for positioning and are expected to stabilize ahead of overseas markets, potentially starting an autumn rally in August.
Therefore, we maintain our forward-looking bullish stance and advise investors to respect short-term volatility and strictly control leverage while seizing the left-side opportunities created by market panic clearance. Instead of gambling with leveraged bottom-fishing, a strategy of phased positioning and exchanging time for space is more suitable.
In the medium to long term, confidence should be maintained in "global AI technological progress and the diffusion of China's AI industry chain." The SMART framework should be used to screen hard-core assets in the AI era, focusing on three main investment themes:
First, high-tech and hard-tech, anchoring on companies with high prosperity and supply shortages in the core segments of the AI industry chain. The strategy should shift from "chasing dreams" thematic speculation in the first half of the year to a "down-to-earth" style of fundamental investing based on medium-term earnings and valuation cost-effectiveness.
Second, safety assets, covering key resource categories such as copper, tungsten, molybdenum, rare earths, and energy.
Third, the overseas expansion track, including power equipment, chemicals, and biomedicine.
Finally, during the AI prosperity diffusion, leading companies in traditional industries also benefit from AI technology empowerment. It is recommended to allocate to leading non-bank financial institutions, particularly focusing on brokerage leaders with a high "AI content."
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