An analyst has reiterated a cautious stance on global equity markets for the short term, stating that the aftereffects of a "summer chill" are not yet over. However, the firm also believes the current market adjustment presents a disguised opportunity, making it a time to "sow with tears" by positioning in high-quality core assets in Hong Kong and China A-shares through a left-side investment approach.
Where to start
The firm had previously issued a "Summer Chill" warning in early May, followed by repeated alerts throughout June and July about significant downside risks for global stock markets. These warnings specifically highlighted that the AI trade had become excessively crowded in the short term and was facing macro and micro-level adjustment pressures.
Outlook for the current market
The forecast remains bearish on global stock markets for July. The primary reason is that neither macro nor micro liquidity conditions support a bullish stance. Overseas markets, in particular, could face liquidity shocks that exceed expectations. On the macro front, key variables to watch include US Treasury yields, the US dollar, and related factors like inflation, oil prices, and geopolitical tensions. After a temporary easing of risk in mid-June, renewed conflict in the Middle East and a re-closure of the Strait of Hormuz have increased the risk of rising US Treasury yields ahead of the Federal Reserve's late-July meeting.
A more alarming risk lies in the micro liquidity environment overseas. Before mid-August, the deleveraging impact and crowded trade reversal effect following the collapse of the leveraged rally in South Korea's stock market could be worse than anticipated. There is a need to be cautious about a potential chain-reaction crash in overseas markets, including South Korea, Japan, Taiwan, and the US. The report notes that overseas markets have entered an AI era with highly efficient information flow and increasing dominance of quantitative funds.
The short-term bearish view on global markets for June, July, and up to mid-August is not contradictory to a long-term bullish stance on the current AI-driven technology upcycle. Historically, if short-term rallies over-extrapolate optimistic expectations after a significant run-up, the market can still experience a crash-style adjustment even if the underlying trend remains intact. Looking at history, crash-style adjustments within secular bull markets are not uncommon. The current AI wave is likely not over. The current phase is compared to 1998 during the internet boom, where the tech-driven upcycle entered its second half, shifting from building infrastructure to application diffusion and commercialisation. During the US internet bull market of the 1990s, a liquidity shock triggered a crash between August and October 1998.
Investment strategy
Over the next few weeks, major global stock markets will likely remain in the aftermath of this "summer chill". Historically, this aftereffect phase of a major correction can be brutal. The risk of a reversal effect from excessive leverage and crowded trades from the first half of the year persists. Given the political and public nature of the Chinese stock market, and the willingness and capability of state-backed funds like Central Huijin to intervene, it is expected that the performance of Chinese and global stock indexes will diverge over the next month. A-shares and Hong Kong stocks, which began adjusting in mid-May, are likely to find a bottom and stabilise ahead of overseas markets.
A "rainbow" is expected to appear after the storm, with a potential autumn rally starting as early as August. Investors are advised to remain cautious in the short term, avoid using leverage, and refrain from trying to catch a falling knife. However, for the long term, confidence should be maintained in global AI technological progress and the diffusion of the AI supply chain in China. Even crash-like volatility cannot change this fundamental trend, making the current adjustment a "disguised opportunity."
Why just 10 ASX 200 shares?
For a medium to long-term horizon, the recommendation is to use a SMART framework to select hardcore AI-era assets, focusing on three key themes. The first is high-tech and hard technology, targeting core AI supply chain segments with high growth and supply shortages. This involves shifting from a speculative, theme-based approach of the first half to a fundamentals-driven strategy based on mid-term earnings and valuation merit. The second is security assets, covering critical resources like copper, tungsten, molybdenum, rare earths, and energy. The third is the overseas expansion track, including sectors like power equipment, chemicals, and biomedicine. Additionally, as AI growth spreads, brokerage firms with a high "AI content" are also seen as having allocation value.
(Note: This content has been rewritten from a financial news report and is for reference only. It does not constitute investment advice.)