A wave of volatility has struck global markets in July, with the AI-driven rally showing signs of a significant pullback. This has prompted a reassessment of investment strategies, with six fund managers from leading Chinese asset management firms suggesting that the A-share market may be transitioning away from a sole focus on technology towards a more balanced allocation approach.

Since mid-June, the AI-linked Korea Composite Stock Price Index has fallen over 40% from its peak, while key storage stocks have dropped over 50%. In China, the tech-heavy ChiNext Index has declined nearly 30% from its high, and core AI indicator stocks have corrected by over 40%. In contrast, the CSI 300 Index has shown greater resilience, with a drawdown of less than 15% from its peak.

The core catalysts for this volatility are multifaceted. Fund managers point to a "stampede" of leveraged capital in South Korea, triggered by tighter regulations on multi-leverage ETFs, which then spread globally. An increasingly hawkish stance from the Federal Reserve, coupled with ongoing geopolitical tensions, has further compressed valuations for tech stocks. Additionally, breakthroughs in China's domestic AI industry, with models offering performance comparable to global peers at lower costs, have prompted a global re-evaluation of the tech supply chain.

The volatility is seen as a valuation rebalancing driven by crowded trades and leverage, not a reversal of the AI industrial trend. The A-share market is showing resilience, supported by lower leverage levels, clear policy support, and relatively low valuations. The short-term negative factors are largely priced in, and the market bottom is being solidified.

Rethinking the Market's Foundation

The current market correction is largely attributed to emotional and trading-level factors rather than a fundamental shift. The main concerns revolve around the sustainability of capital expenditure from North American cloud providers and a marginal slowdown in the growth of annualized recurring revenue for leading model firms. However, these short-term price fluctuations do not alter the core logic of the current AI wave.

Multiple factors are driving valuations back to their mean. The early, excessive profits seen in the AI supply chain are expected to normalize as capacity expands. The concentrated trading in the AI sector, combined with high leverage, has created a fragile environment prone to sharp corrections. The arrival of the semi-annual earnings season is also shifting market focus from speculation to actual performance verification.

Underlying Strength of the A-Share Market

The impact of external market adjustments on A-shares is considered an external factor. While causing short-term disruption, the core determinants remain domestic. Chinese assets, with their complete industrial chain and breakthroughs in frontier technology, have demonstrated strong resilience. The progress of domestic models is driving up demand for domestic computing power, and the domestic semiconductor supply chain is seeing continuous breakthroughs.

The retreat of tech stocks has actually provided liquidity for a rebound in non-tech sectors, leading to a more balanced market style. The core of A-share resilience lies in the intrinsic value support of high-quality leading companies. Many low-valuation leaders across various industries remain at historical lows, and the domestic economy remains stable, with long-term interest rates staying low. The long-term positive outlook for the equity market remains unchanged, with funds flowing into undervalued sectors.

Solidifying the Short-Term Bottom

The current adjustment is not a reversal of the AI industrial trend but a mid-game break caused by crowded positions. After the correction, valuations for some targets have entered a reasonably low range, potentially regaining long-term investment value. The stabilization of A-share tech stocks requires two conditions: a stabilization of overseas AI assets first, and a sufficient volume of trading turnover at the bottom.

From a valuation perspective, core AI stocks have seen significant declines. As long as the fundamental narrative of AI does not fundamentally change, the intense adjustment phase of the global AI supply chain may be nearing its end. The current market has largely priced in previous negative factors, with major A-share benchmark indices at relatively low valuations and many quality assets offering attractive dividend yields.

The short-term bottom is being gradually solidified. The magnitude of the correction is sufficient, policy signals are clear, and there is significant and sustained net inflow of funds into ETFs, especially broad-based ones, which stabilizes market expectations. While the risks from overseas leverage are being released, high-level positions will take time to digest, and the market may experience a period of consolidation.

A Shift Towards Balanced Market Style

The A-share market is expected to return to a differentiated, fundamentals-driven trend. Core stocks in some AI sub-sectors may gradually stabilize, but short-term volatility is likely to persist due to the capital structure. Valuations will return to reason, and stocks that truly benefit from the long-term development of AI will still attract capital, though their allocation proportions may decrease. In contrast, "concept stocks" that lack real fundamentals still have room to fall.

Non-AI sectors will also diverge. Stocks with solid fundamentals that have been previously drained of capital, such as new and old energy, construction machinery, chemicals, and brokerages, are expected to see a recovery. Sectors that have fallen significantly, like real estate, white liquor, and travel chains, also have strong rebound potential.

The market style will likely move away from a fragmented pattern of single-sided bets on technology and gradually move towards a balance between value and growth. The core characteristic of the A-share market in the second half of the year will shift from "valuation expansion" to "performance verification," with an overall trend of volatile upward movement.

Key Investment Directions for the Second Half

Looking ahead, fund managers are bullish on several key areas. The real estate chain, including sectors like building materials, home appliances, and light manufacturing, features high-quality companies with valuations at historical lows. The upstream resource sector, including coal and crude oil, is expected to see improved full-year earnings, with low valuations and high dividend yields. The financial sector, including banks and insurance, also offers attractive valuations and dividend yields.

The AI supply chain remains a core focus, particularly on the theme of self-sufficiency and independence, including domestic computing power and semiconductor equipment and materials. Sectors that have been suppressed by the tech theme, such as power equipment, chemicals, machinery, consumer goods, and pharmaceuticals, are becoming increasingly attractive as their fundamentals improve and valuations recover. During market volatility, high-dividend defensive sectors like utilities and energy provide both a buffer and independent fundamental support.