Entering August, the market gradually began to show a volatile rebound, ending the single-direction downward trend of July, and market confidence has recovered to a certain extent, particularly as technology sectors that had previously declined sharply have seen some recovery. However, the rebound during July and August was also bumpy due to turbulence in external markets. I view the August correction as an aftershock following the major July decline, not the start of a new wave of selling. Therefore, investors should maintain confidence and patience regarding the outlook for the market.
Although many financial commentators have started declaring the arrival of a bear market after July's slump, I believe such pessimism is unnecessary. This market trend is a structural rotation between sectors rather than a reversal of the broader trend. The market continues to revolve around technological innovation as its core theme. Back in June, when market sentiment was euphoric and many investors were frantically chasing optical-related stocks, I advised firmly deleveraging, rationally reducing positions, and balancing allocations across technology and dividend-paying sectors to prepare for the risk that an excessively rapid market rise could trigger a sharp correction.
When emotions were running high at that time, I suggested overcoming greed and taking profits on tech stocks promptly. Sure enough, in July, the Korean stock market experienced a stampede-like decline, and A-shares also saw a sharp pullback in tech stocks. It can be said that when market sentiment is overheated, one must remain calm. According to a psychological principle, investors thinking in a euphoric state use one region of the brain, while rational thinking uses another. So when you feel your head heating up, do not chase highs. Conversely, when the market has undergone a major sell-off and gradually completed the process of squeezing out froth, many investors lose confidence at that very moment. I also advise overcoming fear. When the market broadly feels further declines are coming, that is often the time for a turning point. Many opportunities emerge from declines. Remember firmly the Wall Street adage: risk is created by rising prices, while opportunity is created by falling prices.
The market has now gradually ended its one-way decline and entered a phase of volatile rebound. Although the rebound has been uneven, the trend is progressively forming. Therefore, investors should maintain confidence and patience, and may consider focusing on high-quality stocks or funds that have been unjustifiably sold off to seize future opportunities, while also remaining mindful of market volatility risks.
According to recent economic data, maintaining stable growth remains a key policy objective, and expanding domestic demand is a vital link to boosting economic momentum. Currently, consumption growth remains low, and the sharp decline in housing prices over the past few years has created a significant negative wealth effect, severely impacting residents' consumer confidence and spending capacity. This capital market rally has the potential to generate a wealth effect, thereby helping to boost consumption. Although it cannot offset the huge negative wealth effect from falling home prices, it can at least bolster consumption confidence to a certain extent.
This round of market movement is a highly structural one. Positioning in the right direction and sectors can yield pleasing returns, but missing the rhythm or allocating in the wrong areas could even lead to significant losses. Therefore, this round is completely different from the broad rallies of the past, where nearly all sectors rose in succession. Currently, the market is experiencing structural opportunities amid economic transformation and K-shaped industry divergence. Some sectors, such as chips, computing power, and innovative drugs, clearly benefit from this transformation and have performed well. However, many traditional industries are facing operational difficulties, and their semi-annual reports and upcoming third-quarter results are hardly encouraging. Thus, traditional sectors currently offer fewer opportunities.
The wealth effect generated by this capital market rally only benefits a portion of investors; many have not enjoyed the fruits of this market upswing. As we can see, the current consumption growth rate remains subdued and has not yet seen a good recovery. This market rally has a long way to go, and a stronger wealth effect must be produced before it can truly stimulate consumption.
Recent changes in overseas economic data and monetary policy expectations have also influenced the performance of A-shares and Hong Kong stocks. The US Treasury yield once rebounded significantly, causing considerable damage to US tech stocks. After the US Treasury Department announced an increased buyback of government bonds, yields took a breather and briefly fell, alleviating investor concerns. However, this does not fundamentally solve the problem of the US government's towering debt. US government debt has officially surpassed the $40 trillion mark, while US GDP is approximately $30 trillion, meaning the debt is over 130% of GDP, with annual interest payments reaching as high as $1.2 trillion.
For many investors, US Treasuries now carry a certain degree of default risk, but this does not mean a real default will happen. After all, when assessing US debt, one should not only look at the total scale, but also at whether the US government's fiscal revenue can cover interest payments. The enormous debt accumulation is related to the aggressive military expansion policies and heavy defense spending over the past decade and a half, as well as the significant corporate tax cuts during the two Trump administrations, which reduced government revenue while increasing expenditures, leading to a widening gap. Although this is not a breaking point, it warrants vigilance.
Bridgewater's Chairman and CEO, Dalio, has warned that the total US debt exceeding $40 trillion is a milestone event, and he even predicts that a debt crisis could erupt within three years, potentially affecting all types of global assets. Currently, US bond yields remain elevated. Faced with relatively high inflation, the Fed dares not cut rates to stimulate the economy, nor can it raise rates to prevent the bursting of the US tech bubble. The Fed is thus caught in a dilemma. The 30-year US Treasury yield once broke through the 5% level, incorporating a certain risk premium for default risk. At the September FOMC meeting, the Fed is highly likely to keep rates unchanged.
The weakening of the US dollar index has led to some appreciation of the RMB exchange rate, now around 6.8, which basically aligns with my earlier forecast that RMB appreciation would break below 7. Of course, a stronger RMB also helps attract foreign capital inflows to allocate to RMB-denominated assets. Therefore, while we must remain vigilant about high US bond yields and excessive US government debt potentially causing volatility in global stock markets, we should also recognize that A-shares and Hong Kong stocks still have structural opportunities. However, the likelihood of significant upside is limited. In the second half of the year, A-shares and Hong Kong stocks may continue this pattern of repeated fluctuations, with opportunities captured through sector rotation.
Some time ago, international gold prices experienced a sharp decline. When gold fell to $3,900 per ounce, I put forward a view that many friends may remember: below $4,000 per ounce was a golden pit, offering a good entry opportunity for investors who had missed the earlier rally. Just over a month later, international gold prices have now broken above $4,600 per ounce. Why was sub-$4,000 considered a golden pit? Because the logic supporting the long-term rise in gold prices has not changed. De-dollarization remains a major trend, and the Fed is highly likely to keep monetary policy on hold, with the possibility of rate hikes being slim. Recent US economic data, including non-farm payrolls, retail sales, and inflation numbers, have generally come in below expectations and do not support a rate hike. Therefore, international gold prices are expected to remain in an upward channel. Of course, a rise in gold prices does not necessarily mean gold stocks will also rise, as gold stocks are influenced not only by gold prices but also by market fluctuations, and they are sometimes not synchronized.
Investors can reasonably allocate a portion of their portfolios to gold-related assets, which is a sound investment strategy. This has been my consistent advice over the past two years, and it has proven effective. The total supply of gold is relatively fixed, but the US dollar is being printed in ever-increasing amounts, so allocating to gold is equivalent to hedging against the risk of fiat currency depreciation. However, after a rapid short-term surge, there is no need to chase highs. Instead, wait for gold prices to pull back again before considering buying on dips.
In terms of sector performance, the technology sector is expected to continue serving as the main investment theme. Early last year, I proposed the concept of six major technology sectors. Some have already entered the earnings main upswing, such as the first sector, chips and semiconductors, and the second, computing power, which after significant corrections may still offer good allocation value. Additionally, sectors like innovative drugs and solid-state batteries have recently performed well, driven by policy support and gradual technological breakthroughs. The other two sectors are humanoid robots and commercial aerospace. Because these two directions can deliver earnings in the future but are still in their early stages, their stock performance has been moderate. However, after corrections, opportunities may emerge.
The next wave of upside in the humanoid robot sector may have to wait until the overseas leading humanoid robot company officially announces when its new robot will be unveiled, which could significantly boost confidence in the industry's mass production capabilities. In the short term, this sector is still experiencing repeated fluctuations. In commercial aerospace, China has recently made significant achievements: two successful recoveries, one involving the Long March 10B rocket and the other the Zhuque-3, both achieving perfect landings. This marks substantial progress in commercial aerospace technology. However, since these companies have not yet generated earnings, these two directions are still in the early investment stage, with significant stock price volatility. Investors should be mindful of the risks. But looking at a two-to-three-year horizon, these directions remain worth watching.
The tech market trend in the second half of the year will differ greatly from the first half. In the first half, it was almost a nationwide chase of optical-related stocks, with that sector performing alone. In the second half, different tech sectors are likely to rotate and perform sequentially, with clear divergence. Tech leaders with actual earnings delivery may stand out, while some thematic and concept stocks could experience significant declines. This is also a risk that investors need to note.