Equity markets across the Asia-Pacific region experienced significant declines today following a sharp selloff on Wall Street overnight, with Japanese and South Korean markets particularly hard hit. South Korea's KOSPI plunged more than 7% at one point, triggering a circuit breaker, while Japan's Nikkei 225 fell over 5% and has now dropped 20% from its previous peak, entering technical bear market territory.
In contrast, mainland China's A-share market demonstrated relative resilience. After opening sharply lower, the major indices pared their losses as the session progressed.
The overnight plunge on Wall Street was primarily driven by the outcome of the US midterm elections. The Democratic Party secured control of both the House of Representatives and the Senate, winning decisive victories in several key states. This development sparked concerns among investors that a Democratic-controlled Congress could reduce capital expenditure on AI technology and potentially postpone data center construction projects. Some Democratic lawmakers have argued that data center construction drives up chip costs, which in turn raises prices for consumer electronics and increases the cost of living for ordinary citizens. Data centers also consume substantial amounts of electricity and fresh water, pushing up utility prices and adding to inflationary pressures. These factors have heightened investor worries about potential reductions in demand for AI hardware.
Hardware stocks led by Nvidia suffered steep declines, with Nvidia dropping nearly 10%, while the Nasdaq fell more than 5%. I have previously cautioned that when the Nasdaq experiences significant declines, investors should be wary of pullbacks in technology stocks. Particularly when technology stocks are at elevated levels, if the Nasdaq drops more than 5%, reducing positions by half is a prudent response. Now the Nasdaq has once again experienced a major decline, with cumulative losses of approximately 10% from its peak, though it has not yet entered technical bear market territory.
Meanwhile, the A-share market has undergone four months of decline, and many leading technology stocks have gradually fallen to attractive valuation levels. I have consistently emphasized that successful investing requires overcoming greed and fear, adopting a contrarian approach, refraining from chasing highs and avoiding selling at lows. During May and June when retail investors were enthusiastically chasing AI-related stocks, I recommended a three-step strategy: decisively reducing leverage, cutting positions by half, and maintaining a balanced portfolio with both technology and dividend stocks rather than betting on a single sector. Those who followed this approach should have navigated this round of declines with relative ease.
At relatively low levels, investors must overcome fear and avoid panic selling. This is the time to carefully review your holdings and determine whether losses stem from purchasing the wrong stocks or simply paying too much. If you bought speculative stocks or thematic plays that were being hyped at the time, you should use any rebound to reduce those positions. However, if you paid a high price for shares of companies that remain industry leaders, there is less cause for concern. Over time, strong earnings growth at quality companies should drive share prices higher, potentially allowing you to recover losses or even generate profits.
Contrarian investing is an essential component of value investing. During the significant market declines earlier, I actively urged large institutional funds to increase their market participation, committing real capital to boost market confidence. I also put forward several policy recommendations, including temporarily pausing large IPOs to give the market time to recover, restricting arbitrary share reductions by major shareholders, reducing the frequency of quantitative trading, and encouraging listed companies to increase cash dividends as well as share buybacks and insider purchases with subsequent cancellation.
On Monday this week, the central bank, the National Financial Regulatory Administration, and the securities regulator held two high-profile symposiums that released significant positive signals, including providing more funding support to securities firms, fund companies, and insurance companies through swap facilities, as well as supporting listed companies' buybacks and insider purchases through relending programs with lowered interest rates. One major bank plans to provide approximately 100 billion yuan in credit lines to each of two state-owned companies to support stock buybacks and insider purchases. Judging from the continuously expanding trading volumes in ETFs recently, large institutional funds have been gradually increasing their market participation, purchasing not only blue-chip ETFs tracking the CSI 300 but also index ETFs for the ChiNext and STAR Market boards.
This series of coordinated policy measures has greatly boosted market confidence, reversing the previous one-way decline and ushering in a phase of rebound. This week, the A-share market has experienced multiple significant rallies, with the STAR Composite Index surging 9.9% in a single trading day, substantially enhancing investor confidence. The market has now gradually transitioned from a one-way decline into a phase of volatile recovery.
Although there are negative factors from overseas markets, as long as US stocks do not continue falling persistently and form a bear market trend, the impact on A-shares will be short-term. This is because we have already squeezed out bubbles and released risks through the earlier continuous declines. At this point, investors should instead overcome fear, hold positions and wait for gains, watch more and act less, and patiently await a market recovery.
Chasing rallies and selling into declines, along with frequent trading, are the root causes of losses for many investors. Particularly when market conditions are volatile and subject to large swings, excessive trading often leads to continuous losses and expanding drawdowns. As long as you hold quality assets, you should maintain confidence and patience at present, waiting for the market to warm up. Policy support for the market remains very strong.
There have also been foreign media reports that the listing plans of major technology leaders are being slowed down. If true, this would be a significant positive development, reflecting a protective attitude toward the market and alleviating investor concerns by reducing the diversion of capital from the secondary market caused by IPO issuance, giving the market time to recuperate.
The development of the AI industry in this cycle is beyond doubt—it represents humanity's fourth technological revolution. However, when many investors were frantically speculating on AI technology stocks in the first half of the year, I pointed out that the development of the AI industry and the sharp declines that occur when stocks are overvalued are two separate matters. The tremendous growth of AI technology does not justify excessive speculation. Of course, after four months of decline, many technology stocks that had significant bubbles have fallen 50% to 70%, and some have even become severely oversold. At this juncture, what investors need is confidence and patience.