On Friday, June 26th, stock markets across the Asia-Pacific region experienced significant declines. The South Korean market dropped by approximately 6%, while Japan's Nikkei 225 index fell more than 4%. The A-share and Hong Kong markets also faced substantial pressure, with the Shanghai Composite Index losing over 2%.
This market correction stems partly from profit-taking pressure on sectors that had previously seen excessive gains. Recently, strong technology sectors, particularly semiconductors and computing power/algorithm-related stocks, saw sustained rallies, attracting concentrated capital inflows and accumulating significant paper profits. A pullback in these tech stocks could trigger broader market selling.
Excessively concentrated trading inherently lacks sustainability. This was highlighted after Micron Technology's better-than-expected earnings report fueled a rally in U.S. chip stocks, sparking global enthusiasm. While the long-term potential for semiconductors and computing power in the AI revolution is undeniable—they are foundational to the era—the sharp gains over the past year and the recent extreme concentration of trading risk causing severe capital outflows from other sectors, contributing to the current adjustment.
Around May 20th, a reminder was issued about typical market seasonality, suggesting investors lock in profits from the overheated tech rally, adjust positions flexibly, and maintain a balanced stance. Investors following a disciplined, value-oriented approach who reduced exposure have likely mitigated some risk from this recent downturn.
Since the South Korean market entered a pattern of extreme volatility, this correction appeared increasingly inevitable. The South Korean market's surge this year, driven by a retail investing frenzy in stocks like Samsung and SK Hynix, led to multiple trading halts on the upside. Subsequently, increased divergence between bulls and bears triggered downside halts. This volatility pattern signals growing concerns about a potential chip bubble and heightened market disagreement, which set the stage for the A-share market's recent adjustment.
Historically, excessively high trading concentration often precedes significant corrections or style rotations. A warning signal flashes when the top 5% of stocks by trading volume account for over 45% of the total market's daily turnover. This has occurred five times historically, leading to two style rotations and three market transitions. Classic examples include the 2007 rally in non-ferrous metals and the 2021 surge in liquor and new energy stocks, both followed by sharp collective declines. Recently, trading in the hottest sectors reached a concentration of around 50% for the top 5% of stocks, a clear signal of an impending short-term correction.
This correction primarily represents a necessary adjustment to the previous overly concentrated and rapid price appreciation, not an end to the A-share market's longer-term upward trajectory. Therefore, the correction's depth is likely limited, and the fundamental logic for the medium to long-term trend remains intact.
Discussions with global investors, including during the recent Berkshire Hathaway annual meeting, reveal significant divergence on Wall Street regarding U.S. tech stocks. Extreme bulls believe the AI revolution is just beginning, while prominent bears have already exited. The analogy of a dance party during a bubble was shared: no one wants to leave early, hoping to exit just before the music stops, yet no clock in the room tells the time.
A subsequent meeting with Morgan Stanley executives yielded a humorous yet insightful remark: they advise clients to "dance near the exit." This reflects that many investors participating in the rally are not fully convinced of further major gains but are prepared for a quick exit. This underscores that controlling risk and preserving capital are always more critical than chasing profits, as opportunities perpetually exist.
The recent advice to moderately control positions to navigate this volatile market has proven prudent. With the U.S. mid-term elections approaching, political efforts to sustain market prosperity may persist, but rising inflation—with May's CPI hitting a multi-year high—complicates the Federal Reserve's stance. While the Fed has not signaled future rate moves, market expectations are shifting towards potential rate hikes rather than cuts, another factor contributing to the recent adjustment.
Sector rotation is not inherently negative. A rally concentrated in a single sector is unsustainable and risks a stampede exit at the first sign of trouble. The margin financing balance has recently surpassed a historic high. While the market's total capitalization is larger now, the current margin is heavily concentrated in the top-performing stocks, unlike a decade ago when it was more dispersed. This concentration poses risks, as a correction in leading sectors could trigger forced deleveraging or liquidations.
Investors are advised to deleverage promptly. Reducing leverage significantly improves psychological comfort and lowers portfolio risk. For investors without leverage, reducing position size is a key defensive tactic. The three-step strategy for exiting a market top—first deleverage, then withdraw principal, and finally secure profits—remains valid. It's impossible to know how long a tech rally will last, but this method ensures risk is managed and gains are realized.
The grand narrative of the AI revolution remains unchanged. The penetration rate of AI is still low, and its transformative impact across industries is undeniable. However, the development of the AI industry does not preclude a bursting bubble in related stocks. The dot-com bubble burst serves as a stark reminder: while the internet continued to develop, stocks like Amazon fell 80%. Surviving such a drawdown was crucial to participating in the subsequent recovery. This highlights the danger of concentrating capital in a few stocks and instead suggests seeking opportunities across six key thematic sectors.
These six sectors—semiconductors, computing power/algorithms, humanoid robotics, commercial aerospace, solid-state batteries, and biopharma—are poised to benefit most from the AI era and may exhibit rotational leadership.
Beyond pure tech, a balanced approach pairing technology with "HALO assets" is recommended. "HALO assets" refer to AI-era infrastructure—heavy-asset, low-volatility industries like industrial metals, rare earths, power grid equipment, and renewable energy. These are essential and irreplaceable in the AI era. Tech stocks serve as the growth-oriented, offensive part of a portfolio, while "HALO assets" provide defensive stability, allowing for a balanced and diversified risk profile.
The long-term logic for a sustained bull market in A-shares remains, supported by policy and a structural shift of household savings into capital markets. Even a sharp Nasdaq decline would not end the A-share bull trend but could cause a significant short-term tech selloff. Monitoring the Nasdaq's performance is crucial. A stable Nasdaq is favorable; a drop exceeding 5% warrants substantial position reduction; a plunge over 10% may necessitate exiting overheated tech stocks to manage short-term risk. Subsequent declines would then present opportunities to position in fundamentally sound companies at attractive levels for the next upswing.
Maintaining confidence in the long-term bull market is essential, but proactively taking profits on extended stocks and managing overall exposure remains critically important. Strategic optimism must be paired with tactical prudence for a sustainable investment approach.
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