Reviewing the performance of global markets in July, a wave of significant volatility was observed. The Korean stock market experienced a sharp crash following widespread retail participation, with the Seoul Composite Index triggering multiple circuit breakers. This clearly highlights the overcrowding in the technology sector, where some investors used leverage to concentrate on a single industry, a practice that carries immense risk and fully materialized in July.
US chip stocks saw a steep decline in July, with some leading stocks falling over 50%. Wall Street investors focused on AI suffered a massive liquidation totaling $46 billion, underscoring the dangers of leveraged and concentrated bets on a single sector. Over the past six months, a large number of investors chased these assets, accumulating significant unrealized profits. Once the market turned, the pressure to lock in gains was released, leading to a flood of selling, and some previously favored tech stocks continue to decline.
The A-share market also experienced a sharp correction in July, with the Shanghai Composite Index briefly falling below the 3800-point mark. The STAR 50 and ChiNext indices saw substantial losses, with the chip and semiconductor sectors suffering severe declines. Many investors heavily weighted in tech stocks saw portfolio drawdowns of 40% to 50%, and numerous stocks were halved in value. Since returning from the Berkshire Hathaway annual meeting in Omaha in May, I have been consistently warning of the risks in tech stocks, advising caution. Warren Buffett believes the current US stock market is highly speculative, with significant capital shifting from stable assets to high-volatility growth stocks. In a recent interview, he reiterated this view on speculative sentiment, and Berkshire Hathaway has been reducing its holdings during the US market's rally, with its cash position now below 40% of the portfolio.
After the meeting, I shared the cautious approach suggested by a Morgan Stanley executive. Given his massive capital base, Buffett prioritizes allocating to stable-return assets like Coca-Cola, avoiding high-volatility tech stocks. Most retail investors have smaller capital bases and seek to capture the volatility of the tech sector, but they must not chase highs. Chasing highs inevitably leads to large losses during market downturns, while buying quality assets on dips generates long-term returns—this is a point I have consistently emphasized. When A-share margin balances exceeded 3 trillion yuan, I became deeply concerned about the risk. This 3 trillion yuan in leveraged funds was not diversified but concentrated in a few strong sectors comprising only 5% of the market. Once the "herding" structure loosened, a sharp market decline was inevitable.
From the current perspective, market leveraged funds in July decreased by over 250 billion yuan, mostly from forced liquidations or investor exits. This once again underscores that investors should never use leverage and must actively deleverage. I define this tech stock downturn as a "bubble squeeze" rather than a full collapse, as the Nasdaq has not experienced a crash-like decline, so a complete bubble burst cannot be confirmed. Since the market is in a squeeze phase, once the selling pressure from profit-taking is fully released, some high-quality tech leaders that were unfairly sold off may see a recovery. Investors can continue to focus on long-term opportunities from the AI tech sector. However, the current decline may not be fully halted, as many tech stocks are still in a downtrend. Investors must wait patiently for the market to stabilize before positioning.
Technological innovation remains a long-term direction, and the tech sector's upward cycle has not ended. This adjustment is a medium-term correction, not the end of the trend. Therefore, investors can continue to focus on the six major tech innovation sectors I previously mentioned, with chip semiconductors and computing power being core beneficiaries of the AI revolution. After the sector's sharp decline, there may be opportunities for strategic positioning. When the market is falling, investors must overcome fear and be willing to buy quality stocks or funds on dips. When the market was widely chasing highs, I advised overcoming greed, taking profits, and exiting positions. By deleveraging, reducing holdings, and balancing tech and dividend stocks, investors can manage risk.
After this significant decline, many tech leaders have entered a reasonable valuation range, with some risks released. Investors can seize opportunities to position for the next cycle. In August, the market is likely to maintain a volatile, oscillating trend, with continuous sector rotation. A one-sided rally or sharp sell-off is unlikely. On one hand, investors can focus on sectors that have corrected significantly, such as chip semiconductors, computing power, and optical modules, waiting for opportunities to buy on dips. On the other hand, investors can watch the humanoid robot sector. The listing of related stocks in August could drive the sector's performance, as the machinery and equipment sector has already shown strong gains over the past two trading days, warranting continued tracking.
The postponement of the launch of Musk's new humanoid robot, Optimus V3, is a short-term negative but does not change the industry's long-term development logic. Musk has closed the California factory producing Model S and Model X to convert it into a humanoid robot production line with an annual capacity of 1 million units, aiming to complete construction by year-end. He also plans to build a production line in Texas with an annual capacity of 10 million units. It is only a matter of time before Tesla's humanoid robots achieve mass production. After a significant correction, the humanoid robot sector has some investment value. The robot industry is a long-term, high-growth sector, and investors should position from a medium-to-long-term perspective.
The innovative drug sector showed a contrarian rally in July, confirming my earlier view: regulators have clarified that centralized procurement only applies to mature generic drugs, not innovative drug companies. The innovative drug industry is poised for long-term development opportunities. In August, investors can continue to focus on leading innovative drug companies with strong earnings growth potential. Currently, the tech innovation sector is developing rapidly, while traditional industries like consumption remain sluggish. Overall consumption growth is still at a low level, and the manufacturing PMI has fallen below the 50% threshold, indicating a slowdown in domestic economic growth. Boosting domestic demand is key to stabilizing economic growth.
Policy measures are likely to continue supporting consumption, including expanding consumption subsidies and stabilizing the stock market to enhance household wealth effects. A stronger stock market allows more investors to gain returns through stocks and funds, which is a key way to increase household wealth, fundamentally boosting consumer confidence and spending power. In July, the manufacturing PMI fell significantly to 49.2%, a drop of 1.1 percentage points from the previous month, indicating a slowdown in economic expansion. By company size, large, medium, and small enterprise PMIs all fell below the 50-point threshold, at 49.5%, 49.7%, and 47.4%, respectively, down 1.2, 0.8, and 0.8 percentage points month-over-month. The business climate for all sizes weakened simultaneously.
Among the five sub-indices of the manufacturing PMI, the production index, new orders index, raw materials inventory index, employment index, and supplier delivery time index all fell below the threshold. The production index stood at 49.9%, down 1.5 percentage points month-over-month, indicating a slowdown in manufacturing activity. The new orders index was 48.5%, down 2.7 percentage points, reflecting a continued decline in end-market demand. The non-manufacturing business activity PMI in July was 49.0%, down 1.2 percentage points, indicating a simultaneous decline in non-manufacturing business activity. The composite PMI output index was 49.3%, down 1.3 percentage points, reflecting a slowdown in overall domestic business operations.
Given the current economic slowdown, the market needs a package of stable growth policies to boost investment and consumption, expand domestic demand, and solidify the economic base. This is a key policy direction to track in the third quarter. Multiple sectors may see structural opportunities in the third quarter. In July, the Hong Kong stock market showed relatively strong performance, outperforming the A-share market. The core reason is that A-share funds were previously concentrated in the tech sector, while Hong Kong stocks had a lower allocation to tech. The Hang Seng Tech Index has experienced multiple sharp declines over the past year. In July, it rebounded significantly, driven by internet tech leaders, creating a clear wealth effect.
These internet tech companies have low valuations and strong profitability. After a significant correction, they have begun a recovery trend. This has boosted investor confidence in Hong Kong stocks and attracted additional capital inflows to explore opportunities, leading to strong performance in July. Entering August, the Hong Kong market remains promising. The Hang Seng Tech Index's cumulative gains are still limited, so it still has allocation value. Stabilization in the Hong Kong market will also help the A-share market stabilize and rebound earlier. Two key allocation directions in Hong Kong deserve attention: first, tech internet companies, which have corrected significantly and, despite a recent rally, still have low valuations, making them suitable for ongoing investment; second, traditional blue-chip dividend stocks, which offer stable and attractive dividend yields, suitable for investors seeking stable returns.
The US stock market, after years of continuous gains, has high valuations, and market divergence on the US tech sector is increasing. The "Magnificent Seven" stocks are at historically high valuations, so investors need to remain highly vigilant. If the Nasdaq experiences a sharp decline showing signs of a bubble burst, investors should decisively reduce positions. The AI tech sector has a clear long-term development logic and broad prospects, but the industry's long-term outlook is not necessarily tied to short-term bubble adjustments. During the 2001 internet bubble burst, the internet industry was in a high-growth phase, yet the Nasdaq fell up to 80%. After the bubble cleared, high-quality internet leaders hit new all-time highs, with impressive gains. However, investors who failed to avoid the 2001 crash could not participate in the subsequent rally.
Currently, the US market needs to focus on preventing the risk of a Nasdaq bubble burst. While seizing investment opportunities from the AI tech sector, investors must insist on fundamental research, filter for tech leaders with earnings support, and always maintain a cautious approach to investing. MACD golden cross signals are forming—these stocks are showing strong gains!