To The Moon

Global stock markets experienced a severe downturn on Tuesday, July 28, with the ChiNext index plunging over 7%. The sell-off was triggered by a sharp decline in US equities overnight, which weighed heavily on Asian markets. Japan and South Korea's stock markets opened significantly lower, with South Korea's KOSPI index dropping over 8% and triggering a circuit breaker. This regional risk-off sentiment directly impacted China's A-share market, depressing investor mood.

The three major A-share indices all fell, with the ChiNext index dropping 7.35%, the Shenzhen Component Index sliding 4.52%, and the Shanghai Composite Index falling 1.16%. Total trading volume across the A-share market reached 2.04 trillion yuan. On a sectoral basis, telecommunications and electronics were among the hardest hit.

Key factors driving today's market sell-off

First, the US Federal Reserve's rate decision meeting this week, combined with the uncertainty of earnings season, has boosted market risk aversion. The Fed is set to announce its interest rate decision early Thursday morning Beijing time (July 30). Although June's CPI data was relatively moderate, the ongoing volatility in the Middle East and sharp fluctuations in international oil prices since July have fueled market fears of a potential rate hike that could exceed expectations. With several major US tech companies scheduled to report earnings this week, foreign capital is inclined to reduce positions in high-volatility emerging market tech stocks to avoid cross-market risk before the results are released.

Second, news regarding an infrastructure agreement involving Nvidia has intensified concerns about AI capital expenditure. Bloomberg reported that Nvidia's latest infrastructure agreement, which includes a partnership exceeding $500 billion with a certain group and plans to spend up to $250 billion to help OpenAI lease computing power, has raised doubts about the cash flow logic of the AI capital expenditure cycle. It also brings additional worries about supplier financing risks.

Additionally, Israeli Prime Minister Benjamin Netanyahu's arrival in the US and his upcoming visit to the White House to meet with President Trump have added more uncertainty to the already complex situation in the Middle East, further dampening market risk appetite.

Defensive sectors buck the trend

Amid the sharp correction in tech stocks, the food & beverage and hotel & tourism sectors showed relative strength. The Politburo meeting typically held at the end of July will set the policy tone for the second half of the year. At a July 13 premier’s symposium, expanding domestic demand was highlighted as the top priority for the second half, with a call to "systematically implement policies to unleash domestic demand potential." Recent releases of the "Opinions on Promoting the Expansion and Quality Improvement of the Service Sector" and the "15th Five-Year Plan for Expanding Consumption" provide clear policy expectations and are supportive of domestic demand-related sectors.

Market outlook: Approaching the bottom with rotation expected

Despite the significant volatility, we believe the market is getting closer to a bottom. The digestion of current trading structures may be more than halfway through. Institutional long positions in tech stocks have reached historical extremes, and the concentration of trading volume in the top 5% of stocks is digesting slowly at a high level of 50-55%. However, sentiment indicators have fallen to low levels, making a rotational recovery in August highly probable. While the Middle East situation remains a background disturbance, it is not the main driver of the market. We are optimistic about a market recovery in August and September.

Given the current high volatility, investors may consider building positions in batches. Our allocation strategy, consistent with the "style rebalancing" approach since late June, maintains the AI hardware theme as the main line, preferring sector leaders with strong demand certainty. We also recommend a moderate tilt towards sectors that are currently underweighted by institutions but have improving fundamentals, such as lithium batteries, innovative drugs, non-bank financials, and the export chain.

Risk warning: The views expressed are for reference only and may change with market conditions. They do not constitute investment advice or a guarantee. Fund investments carry risks. Investors should proceed with caution.