To The Moon

In a recent program, Zhang Yidong, Chief Economist at Haitong International, shared his latest analysis on the A-share and Hong Kong stock markets.

Key Points on the 'Summer Chill'

He emphasized that even a bull market, or a super bull market, cannot avoid the impact of significant adjustments in capital flows. The so-called "summer chill" he refers to is not a lack of faith in AI's fundamentals. He is a strong proponent of AI, viewing it as an epoch-making technological revolution—the fourth industrial revolution.

However, he stresses the need to trust common sense. Rome wasn't built in a day, and long-term prospects should not be short-term concerns. Just as we wouldn't stop eating because the Earth might perish billions of years from now, we shouldn't assign infinite valuations to AI simply because of its vast future potential.

A human weakness is excessive convergence in thinking. Even if a long-term view proves correct, chasing highs in the short term can lead to significant pullback risks, especially when leverage is involved, which is particularly dangerous.

Caution Advised for the Coming Months

This year requires extra caution, as there may be substantial volatility ahead. This could be the first major market fluctuation in the context of humanity entering the AI era and investors using AI to speculate on AI stocks, analogous to the events of October 19, 1987.

From an overseas perspective, he maintains a stance of "half sober, half intoxicated" towards the potential "summer chill" in June, July, and even August. Sobriety is needed regarding capital flows, while one can remain optimistic about long-term fundamentals. However, capital flows must be respected.

Defining the 'Summer Chill'

He describes it as a "summer chill" caused by "one gray rhino and three black swans." On May 6th, during Haitong International's summer strategy meeting, they released a report titled "Summer Chill." They predicted a volatile summer market with an N-shaped trajectory: a surge in May, followed by downside risks in June, July, and even August, potentially giving way to a renewed upward N-shaped move and new highs after September.

The risks in June through August are worth avoiding because they are not mere short-term emotional fluctuations of daily ups and downs. The pullback during these months could lead to noticeable declines in institutional investors' net asset values and significantly impact investor wealth.

Market Stage and Outlook for Chinese Assets

If September 2024 is considered the starting point of this bull market, the current phase is likely the end of the first half or the middle game. Recently, amid overseas turbulence, a high degree of consensus has formed: on one hand, belief that China's economy has stabilized, and on the other, no excessive expectations for macro liquidity or monetary policy.

Traditional industries are gradually becoming "quasi-fixed-income" assets, with more focus on dividends than doubling. The current market divergence is somewhat overcorrected, with traditional sectors becoming "blood bags" or "cash machines." If overseas shocks occur, A-shares and Hong Kong stocks will be affected, but post-consolidation, the market will be healthier. Investors will shift from passively and frantically chasing the "light" to calmly recognizing the truly beneficial areas in the second half of the AI wave.

Therefore, starting in the second half of this year, A-shares, Hong Kong stocks, and even overseas markets may enter the second stage of the market cycle. From September this year through 2028 could be the true diffusion and climax period of this bull market.

Not the End of the Tech Bull Market

Despite the warning about the summer chill, this is not the end of the technology bull market. It is merely a mid-cycle consolidation within the broader technology bull market occurring against the backdrop of the current Juglar cycle, including in China. After this consolidation, a more exciting, diversified, and broadly diffused second half will follow.

The revaluation of Chinese assets is still in its early stages but is gaining momentum. This spark is currently overly concentrated in AI hardware. It will later spread like wildfire. The true systemic opportunity for Chinese assets has not yet arrived; it should emerge from the fourth quarter of this year through 2028, when a broad revaluation of Chinese assets will be seen.

Hong Kong Market Outlook

Hong Kong stocks have been in a bull market since February 2024, albeit encountering an "early summer cold snap." The fundamental "new triangular support" also applies to Hong Kong. Overseas volatility in June-July will affect Hong Kong stocks, but the low point for the first half of the year may already be in place. The market is currently stagnant, fluctuating within a range. Potentially as early as August or as late as September, the Hang Seng Tech Index and Hang Seng Index are expected to follow A-shares into a major upward wave.

The core of whether the Hang Seng Tech Index can reverse lies in "AI Internet" rather than "consumer Internet."

Essential Cautions for Investors

First and foremost, survival is key—avoid using leverage. If overseas markets face trouble, it will affect others. Without leverage, one can ride out the volatility; with leverage, one might fail before dawn.

Second, the biggest risk is strategically missing the AI era, not short-term volatility. Highlighting risks is to prevent excessive exuberance, chasing highs, selling in panic, and mistiming the market rhythm. However, as long as one avoids leverage and selects the right stocks, it is entirely possible to continue investing during pullbacks and increase allocations to technology assets.

Zhang Yidong believes the primary contradiction in the global market for the medium term (June-August) is capital flows. Investors should be wary of a "summer chill" triggered by "one gray rhino (rising long-term U.S. Treasury yields) and three black swans (financing pressure, emerging market crises, excessive market crowding)." The inflection point for the N-shaped downward move in the summer market could occur between June 10 and June 18. He advises investors to avoid leverage and "stay half-sober about capital flows, half-intoxicated about long-term fundamentals."

However, he emphasizes this is not the end of the technology bull market but a mid-cycle consolidation within the context of AI as the fourth industrial revolution. For Chinese assets, from a medium-term perspective, A-shares face a "ceiling" (constrained by three micro-liquidity factors), but in the long term, supported by the new triangular foundation (institutional dividends, macroeconomic bottoming and recovery, new quality productive forces), they will experience a slow, long-term bull market with a gradually rising bottom.

Hong Kong stocks are expected to follow A-shares into a major upward wave, potentially as early as August or as late as September. The reversal of the Hang Seng Tech Index hinges on "AI Internet," not "consumer Internet." He stresses that the greatest risk for investors is strategically missing the AI era, not short-term volatility. As long as leverage is avoided and the right direction is chosen, one can continue to increase allocations to technology assets during pullbacks.

Short-Term vs. Medium-Term vs. Long-Term Drivers

The host asked about the core contradictions in the current global and Chinese capital markets. Zhang Yidong explained his methodology of identifying the primary contradiction for specific timeframes: short-term, medium-term, and long-term.

Shorter-term market movements, such as monthly, weekly, or even daily trends, are more related to risk appetite. Factors like stock market policies, investor trading behavior, market crowding, and turnover rates determine these moves. Recent volatile performances in Hong Kong, Japanese, and Korean stocks exemplify this, driven more by shifting risk sentiment than macroeconomic or capital flow fundamentals.

Medium-term trends, spanning a quarter or within a year, are primarily determined by capital flows. This includes both the "price" (like the risk-free rate, often the U.S. 10-year Treasury yield as the global asset pricing anchor) and the "quantity" of capital (macro indicators like M1, M2, social financing growth, and micro factors like asset allocation trends and market liquidity structure).

Long-term trends, looking beyond a year, especially three to five years, depend on fundamentals. Key cycles are the inventory cycle (Kitchin cycle, ~40 months) and the equipment renewal investment cycle (Juglar cycle, 8-10 years).

Current Market Divergence: Common Sense vs. 'This Time Is Different'

Applying this framework to the current medium-term outlook, the decisive variable is capital flows, not short-term risk appetite. Regarding capital flows, global investors are divided into two camps: the "common sense" camp and the "this time is different" camp.

The common sense camp believes that even a bull market, including a tech bull market, is still influenced by capital flows and fluctuations in the global asset pricing anchor (U.S. 10-year yield). They argue that geopolitical events like the Strait of Hormuz disruption impact global supply chains, inflation (especially for energy-dependent economies), and with a lag, the U.S. economy. High, sticky U.S. inflation, compounded by geopolitics, could drive inflation higher in the coming months. Even with a new Fed Chair inclined towards rate cuts, data dependency will likely keep the Fed hawkish if inflation pressures rise, pushing long-term U.S. yields higher.

The "this time is different" camp, a recurring theme in tech bull markets, believes macro factors are irrelevant. They follow the narrative driven by AI leaders like Nvidia's CEO, believing AI itself defies conventional wisdom. Currently, this camp dominates, as high risk appetite fuels short-term moves where any mention from key figures can cause sharp stock rallies, reflecting over-exuberance and extreme crowding in certain themes.

Zhang's Stance and Historical Parallels

Zhang aligns with the common sense camp. He believes the medium-term primary contradiction is capital flows, specifically the potential for an unexpected rise in long-term U.S. Treasury yields in June, July, and August. History shows that even in euphoric markets, one must respect the medium-term influence of capital flows.

He cites two historical parallels. The first is 1987, when long-term yields rose from 7% at the start of the year. The market believed "this time is different" due to Reaganomics and favorable geopolitics, ignoring inflation and rate concerns. However, when the 10-year yield breached a critical level (10%), it triggered the October 19th crash—the first major crash in the era of program trading. Today, with increasing retail leverage in markets like the U.S., Japan, and South Korea, the situation, while different in degree, shares similarities with the pre-crash environment of 2015 in China. Caution is warranted for potential significant volatility, especially as this is the first major fluctuation in the era where AI is used to speculate on AI stocks.

The second example is the summer of 1998, during the Asian Financial Crisis and Russian debt crisis. U.S. long-term yields fell as capital fled to safe-haven Treasuries. However, risk assets globally contracted sharply, and U.S. tech and internet stocks also fell 30-50%. This illustrates that capital flow shocks—whether through "price" (yields) or "quantity" (risk asset contraction)—can impact even strong bull markets.

Thus, the "summer chill" warning is not about AI's fundamentals but about respecting capital flow realities. From an overseas perspective, a "half sober, half intoxicated" approach is prudent for June-August: sober on capital flows, optimistic on long-term fundamentals.

Medium-Term View on A-Shares: A 'Ceiling' Exists

For Chinese stocks, the medium-term primary contradiction is also capital flows, specifically micro-liquidity rather than macro-liquidity. Macro-liquidity is supportive due to a low-interest-rate environment and a scarcity of effective assets, making equities relatively attractive compared to bonds.

However, micro-liquidity faces three pressures. First, potential overseas liquidity shocks in the next few months could suppress global risk appetite and spill over. Second, April's economic data showed a slowing recovery pace, which concerns some overseas investors and dampens sentiment. Third, extreme structural divergence in A-shares and Hong Kong stocks leads to high crowding in popular themes, making the market prone to volatility on any setback.

This extreme divergence also conflicts with regulatory desires for a slow, long-term, healthy bull market. New mutual fund regulations encouraging benchmark alignment may force rebalancing away from the most crowded, high-performing assets, further suppressing risk appetite in the short term. Therefore, from a medium-term perspective, A-shares face a "ceiling" due to these three micro-liquidity constraints.

Long-Term View on Chinese Stocks: Gradual Ascent

Powerful long-term supportive factors exist, namely the "new triangular support." First, institutional dividends from China's commitment to a distinctive financial development path, including state support for capital markets. Second, the macroeconomy has bottomed and is in a slow recovery phase, with systemic risks in real estate gradually resolving. Third, innovation-driven new quality productive forces are becoming an increasingly significant economic pillar.

This support fosters a long-term trend of wealth reallocation into Chinese equity assets by both domestic and international investors. Consequently, Chinese stocks (A-shares and Hong Kong) possess medium-to-long-term upward momentum. Combining medium-term (quarterly) and long-term views, the market is in a process of oscillating higher with a gradually rising floor.

The 'Gray Rhino and Three Black Swans'

The "one gray rhino" is inflation in the U.S. and emerging markets. With the Strait of Hormuz still disrupted, inflationary pressure is certain, preventing Fed rate cuts and potentially forcing a more hawkish stance—a significant headwind for risk assets, reflected in rising long-term U.S. yields. He monitors whether the 10-year yield will sustainably break above 4.5%. Despite official attempts to talk it down, underlying fundamentals like strong job data suggest upside risks, particularly for the May inflation data on June 10th.

A key issue is who will buy U.S. Treasuries. Recent weak auction demand, reduced buying from Asia (China, Japan), and lack of interest from Middle Eastern funds (whose fiscal positions have worsened) point to pressure. The Fed, under a Chair inclined towards rate cuts and balance sheet reduction, is unlikely to launch QE. Therefore, rising long-term yields may be inevitable until a market shock potentially forces a policy shift, similar to post-1987 crash.

The "three black swans" are: 1) Financing pressure. Massive upcoming IPOs like SpaceX (estimated $60-70B) could drain liquidity from existing markets and stocks. AI giants are also increasing capital expenditures, reducing funds for stock buybacks and potentially increasing debt issuance, which would be costlier if yields rise. For Hong Kong, a significant wave of share lock-up expiries in June-July, particularly for AI-related tech firms with high valuations, poses substantial selling pressure from institutional investors seeking exits.

2) Emerging market crisis. Continued Strait of Hormuz disruption could lead to higher-than-expected global inflation, disproportionately impacting emerging markets in Latin America and Asia, which have already seen significant stock declines and currency depreciation this year.

3) Excessive market crowding in AI. Leverage and retail participation are at multi-year highs in markets like Japan and South Korea. Extreme crowding sets the stage for sharp, cascading sell-offs if sentiment reverses, reminiscent of April-June 2015 in China's A-shares.

Critical Timing: June 10-18

The inflection point for the N-shaped downward move in the summer market likely falls between June 10 and June 18. Key events include the May U.S. inflation data on June 10th and the first post-meeting remarks by new Fed Chair Kevin Warsh around June 18th, which are expected to be hawkish. The Fed's dot plot and voting behavior will also be crucial. The balance within the Fed has shifted, with the "dovish/Trump camp" becoming more isolated. Therefore, these dates are critical for assessing the shift in market dynamics.

Current Stage of the A-Share Market

Compared to history, the core difference is China's economic transition towards innovation-driven growth. The old macro-driven model focused on inventory cycles and policy shifts. The new logic for a slow, long-term bull market is the "new triangular support," where innovation provides the upward thrust, while a bottomed macroeconomy and institutional dividends provide the floor.

The current phase is still early. The market has shifted from excessive pessimism on Chinese assets to discovering structural bright spots, currently overly concentrated in AI hardware and infrastructure (e.g., optical modules, CPO). This reflects the "innovation" pillar but is too narrow. The next stage will involve diffusion: from AI hardware to broader AI applications, then to related fields like commercial aerospace, robotics, supporting industries like power equipment, and finally to traditional industries transformed by technology and globally competitive export chains.

Thus, the market is in the first stage—recovery—which is nearing its end. The second stage, involving broader diffusion, is expected to begin in the second half of this year.

Revaluation Stage for Chinese Assets

If September 2024 marks the bull market's start, we are likely at the end of the first half or in the middle game. The market has firm confidence in innovation but lacks confidence in its ability to diffuse, drive industrial upgrade, overcome low inflation, and boost societal wealth. Starting in the second half, especially by Q3 end (September), alongside overseas developments and further stabilization in China's property sector, the period from September 2026 through 2028 could be the true diffusion and climax phase.

Globally, the AI wave is also in its middle phase within the Juglar cycle. The first phase is "AI for humans," which has natural penetration limits. The second phase will be "AI for robots." Current penetration rates for generative AI are around 40%+ in China and ~28% in the U.S. Risks of oversupply emerge at 50-60% penetration, which is a concern for 2028-2030, not now.

Therefore, the summer chill warning is not the end of the tech bull market but a mid-cycle consolidation. Post-consolidation, a more diverse and diffused second half awaits. The revaluation of Chinese assets is a growing spark, currently concentrated in AI hardware, but will eventually spread widely from Q4 this year through 2028.

Hong Kong Stocks: Awaiting the Upturn

He described Hong Kong stocks since early 2024 as a bull market encountering an "early summer cold snap." The "new triangular support" applies. Overseas volatility in June-July will impact the market, but the first-half low may be established. The market is currently range-bound. He expects the Hang Seng Tech Index and Hang Seng Index to potentially follow A-shares into a major upward wave as early as August or by September.

The key for a Hang Seng Tech Index reversal is its transformation into an "AI Internet" play, not just "consumer Internet." For pure consumer internet companies, the focus should be on dividends and buybacks, not growth. If internet companies demonstrate AI empowerment, they deserve systematic revaluation. The early June surge was likely driven by short covering. The fundamental reversal depends on the AI narrative taking hold. The cold snap for Hong Kong is nearing its end. During the June-July overseas chill, the market may oscillate around its yearly low. Investors can consider gradual, non-chasing accumulation around themes of AI diffusion, AI empowerment, energy tech, and hard assets. He is neutral-to-optimistic on the indices now, turning more optimistic by September.

Second Half of the AI Wave: Focus on Application and Commercialization

The first half focused on infrastructure and computing power—a supply-side "fix what's missing" story. Related assets have transitioned from narrative-driven to order-driven to earnings-driven, becoming "high-probability" rather than "high-payout" bets, requiring scrutiny of actual financials.

The second half's logic lies in application realization and commercialization, shifting from supply-side to demand-side. Stock selection must focus on revenue, profit, and business scenarios. Key features include: 1) Accelerating penetration rates from 30-40% towards 60%+, with token usage exploding. 2) Industrial logic diffusion—"everything with AI"—AI empowering traditional sectors. 3) Increased volatility as consensus forms and leverage amplifies moves, leading to sharp sell-offs on shocks. 4) Broader market diffusion from tech into more sectors like robotics, autonomous driving, commercial aerospace, exports, and advanced manufacturing.

Overlooked Traditional Sectors

Two types of traditional sectors are undervalued. First, advanced Chinese manufacturing with export capabilities (precision manufacturing, specialty chemicals, power equipment, defense tech) that can be AI-empowered. Recent weakness stems from soft April macro data, but the worst is over. Focus should be on companies gaining from AI-driven efficiency or export competitiveness, presenting revaluation opportunities in the next 6-24 months.

Second, high-dividend yield assets (energy, resources, gold, Hong Kong insurers, property, utilities) offering yields above 5% versus a ~1.7% risk-free rate. They provide defensive ballast and potential beta if imported inflation rises.

Investment Framework: 'SMART' Hard Assets

His "SMART" framework outlines three investment lines: S (Security assets): Perpetual high-dividend, stable cash flow plays (state oil majors, thermal power, utilities, copper/aluminum, gold). MA (Manufacturing + going Abroad): Advanced manufacturing exporters (machinery, electrical, power equipment, specialty chemicals, home appliances, robotics, EV component leaders). RT (R&D + Technology): High-tech and hard-tech (optical modules, CPUs, defense tech, commercial aerospace, low-altitude economy, semiconductors).

Final Warnings for Investors

The most crucial reminders are: First, survival is paramount—avoid leverage. With high concentration in tech and near-record margin debt in A-shares, an overseas shock could be devastating for leveraged positions. Second, the biggest risk is strategically missing the AI era, not short-term volatility. In major technological shifts, believing early is key. The first half of this AI revolution is at halftime; the second half could be more exciting. Instead of switching to undervalued sectors, focus on finding opportunities within the core theme. Highlighting risks aims to prevent mistiming due to over-exuberance. Without leverage and with correct stock selection, investors can and should continue to build positions in technology assets during market pullbacks.