HAITONG INT'L: Layout for the autumn market, embracing a new logic and two main lines.

HAITONG INT'L released a research report stating that the market dynamics shifted in August, with the autumn market having already experienced a rapid rebound. Moving forward, strategically, the outlook remains bullish, but tactically, it is essential to be grounded and avoid chasing high prices in hopes of a rebound. In August, the focus should be on positioning, seeking new logic amid divergences, and selecting new mainlines amid polarization. For both the Chinese and U.S. stock markets, new main lines in the market are being nurtured, and the mid-term opportunities worth seizing are those where funds spread from the previously crowded old logic to new fundamental logic. Notably, the attractiveness of allocations in Hong Kong stocks has increased, which have already seen a bottom before overseas stock markets. For value investors, it is advisable to take advantage of market volatility for counter-cyclical positioning without worrying about short-term misses, and it is especially unwise to chase high prices after a rapid rebound. In pursuit of relative returns, the focus now should be on less crowded areas, specifically directions that are empowered by artificial intelligence and can lead to new demands exceeding expectations rather than simply reverting to the heavily crowded tech hardware of the first half of the year. It is not about stubbornly adhering to the old logic that heavy capital expenditure leads to miracles and AI hardware will always rise in price. The autumn market will reflect the diffusion of the AI bull market, embracing a new AI logic dominated by applications and developing along two new main lines: first, the TMT market focuses on differentiation, transitioning from thematic investment to performance validation, and shifting the AI industry logic from emphasis on AI infrastructure to AI applications. Second, there is a diffusion along the AI+ main line towards non-AI technology, where hard assets in the non-AI technology industry are blooming anew and undergoing value reassessment. HAITONG INT'L highlights the following key points: Last week, the tech rebound shifted from semiconductors, which led the previous week, to storage and other previously oversold sectors. The S&P 500 hit a new historical high, while the South Korean KOSPI ended its prior seven-week losing streak, surging 11.5% for the week. From an earnings and valuation perspective, the rise of the S&P 500 was primarily driven by upward revisions in forward earnings, while forward valuations remained basically flat. Performance and order volumes continue to validate the demand for AI computing power, with computing rental companies showing robust performance; contracts for cloud computing, demand for optical communication, and orders for power equipment all indicate that short-term demand for AI computing power still has strong support. Market Outlook: The autumn market is anticipated to shift from deep rebounds to a phase of fluctuating differentiation, establishing new logic and main lines for the second half of the bull market. First, persistently high long-term U.S. Treasury yields are expected to exert negative pressure on the recently rebounding global major stock markets, particularly on growth stocks. However, unlike in July, the current situation presents both challenges and opportunities; after turbulent fluctuations, the nature of the autumn market will transition from deep rebounds to confirming reversal trends. The yield on 10-year U.S. Treasuries has broken through a nearly three-year high; in the coming weeks, it is not unlikely to approach 4.8% to 4.9%, with extreme scenarios possibly reaching around 5%. The gray rhino of summer's cold wind that we previously warned of mainly concerns the continuous rise in long-term U.S. Treasury yields, compounded by geopolitical risks that could trigger global dollar liquidity shocks. The major macro and micro financial impacts from overseas were largely released in July, and the bottom zone for the second half's market has basically formed. Since the end of July, global major stock markets, particularly U.S. stocks, have undergone rapid and substantial rebounds, with key U.S. indices hitting new highs or approaching historical highs. High long-term yields will increasingly suppress valuations, particularly for growth stocks. It is crucial to remain vigilant, as real rates and term premiums are keeping long-term U.S. Treasury yields elevated; underwhelming economic data is merely dampening expectations for U.S. interest rate hikes and short-term rates. Last week, the U.S. CPI for July fell from 3.5% to 3.4% year-on-year, while core CPI decreased to 2.5% year-on-year; the PPI was flat month-on-month and below expectations; Julys retail sales fell 0.6% month-on-month, marking the largest drop in 14 months. Market expectations for at least one Fed rate hike within the year have further dropped to 68%, with the 2-year Treasury yield down 2.40 basis points to 4.17%, while the 10-year yield rose 4.48 basis points to 4.69%, widening the 10-year to 2-year spread by 6.9 basis points over the week. HAITONG INT'L predicts that in the second half of the year, long-term Treasury rates will likely first rise then fall, while global stock markets will initially face pressures before rising. Three short-term variables are the focus: 1) U.S.-Iran conflict. 2) Policy signals from the Fed Chairman at the Jackson Hole conference. 3) The impact of U.S.-Japan joint intervention in the yen's exchange rate and whether the Bank of Japan will raise rates early. Recently, market expectations for a rate hike by the Bank of Japan in September have significantly risen, with the probability nearing 80%, and a faster pace of rate hikes is not ruled out, which would help narrow the U.S.-Japan interest rate differential and alleviate depreciation pressure on the yen. However, the simultaneous rise in Japanese bond yields and potential yen appreciation could exert pressure on Japanese stocks, particularly exporters and high-valuation growth stocks, and could trigger a round of concentrated deleveraging in carry trade yen arbitrage, thus amplifying volatility in risk assets through global leverage unwinding. Second, whether the autumn market can genuinely transition from deep rebounds to the second half of a bull market crucially depends on confirming the new logic and main lines of the fundamentals. Since the end of July, the global major stock market rebound has yet to confirm new logic and new main lines, with hotspots scattered and shifting rapidly. The current market movements resemble more of a correction following the substantial declines of the first half of the year, particularly in July, akin to a certain type of deep rebound. Following an intensely crowded trading environment and fully priced expectations in Q2, if the bull market represented by AI technology is to persist, we have been emphasizing that the AI supply chain needs to establish new logic for sustainable growth, leading to new investment main lines emerging in the market. We believe it is highly probable that the tech bull market will enter a new phase in alignment with the AI industry wave, signifying that the AI trend has started its second half, wherein AI applications will scale and AI+ will empower various industries. The new logic for the second half of the AI bull market will shift from hardware-led to AI application-led, with market opportunities expanding in scope rather than the extreme contraction seen in the first half focused solely on light and storage. The new phase of the autumn market will transition from the deep rebound observed in August to seeking new main lines driven by the AI bull market's second half, nurturing new leading industries or sectors. Firstly, the AI-driven Juglar cycle is entering its second half, with the focus of the technology wave moving from infrastructure construction to applications. Infrastructure addresses the question of existence, while application diffusion determines whether it can genuinely create revenue and profit. If AI applications fail to establish continuous commercial value, this round of the market may ultimately reflect a valuation bubble; however, if AI indeed represents a new technological revolution, unexpected diffusion at the application level will occur, and through genuine demand, it will, in turn, drive the construction of computing power and infrastructure, ultimately forming a virtuous cycle. Currently, some positive signals have emerged. Coding and other scenarios have been the first to verify AI's potential for enhancing efficiency and willingness to pay, indicating that the path for AI's technological capabilities to transform into actual productive forces is gradually being paved. Meanwhile, as China's open-source large model capabilities improve and usage costs continue to decline, the threshold for the adoption of Agents and various AI tools is expected to lower further, creating conditions for the diffusion of AI across various industries. Secondly, we anticipate that over the next year to year and a half, the AI bull market will also enter a new phase of Artificial Intelligence +, with the main line of the market gradually shifting from hardware-led to AI applications and AI+ across various industries, with an expansion in AI application demand, which will, in turn, drive opportunities for AI infrastructure and AI hardware, resulting in a virtuous cycle in the bull market's expanding scope. The AI bull markets second half does not imply the hardware market is entirely killed off or will enter a bear phase; however, the hardware sector will transition from a phase of broad increases to clear differentiation: truly technologically adept leaders with order fulfillment and sustainable profitability are likely to recover and even reach new highs after valuation digestion; on the other hand, stocks lacking fundamental support, including speculative stocks, reflection stocks, and purely conceptual assets, may find their AI bull market already ending. Investment Strategy: Positioning for the Autumn Market, Embracing a New Logic and Two Main Lines The market dynamics have shifted in August, and the autumn market has undergone a rapid rebound. Going forward, the strategic outlook remains bullish, but it is crucial to remain grounded tactically, avoiding high-risk pursuits in hopes of rebounds. In August, it is more important to focus on positioning, seek new logic amid divergences, and select new main lines in the face of polarization. For both the Chinese and U.S. stock markets, new main lines of behavior are being nurtured, and the mid-term opportunities worth seizing are those where funds transition from previously crowded old logic towards new fundamental logic. In particular, the current attraction of allocation in Hong Kong stocks has increased, having already found a bottom ahead of overseas stock markets. For value investors, it is prudent to leverage market fluctuations for contrarian positioning without the need to worry about short-term misses and especially unwise to chase high prices after rapid rebounds. In pursuit of relative returns, the focus should now be on less crowded areas, specifically directions that are empowered by artificial intelligence and can potentially lead to new demands exceeding expectations, rather than simply reverting to the previously crowded tech hardware of the first half of the year. It is not about stubbornly sticking to the old logic that heavy capital expenditure leads to miracles and AI hardware will forever increase in price. The autumn market will reflect the diffusion of the AI bull market, embracing a new application-led AI logic, and unfold along two new main lines of structural dynamics: First, the TMT market focuses on differentiation, transitioning from thematic investment to performance validation, and shifting the AI industry logic from an emphasis on AI infrastructure towards AI applications. In the second half, as applications gradually take root, the AI market will shift from broad increases to differentiation. First, in the second half, funds will concentrate on AI hardware leaders with real core competitiveness, while themed and speculative stocks in the AI hardware sector will be abandoned by the market, with attention shifting to the sustainability of high revenue growth, the irreplaceability of research capabilities, and the growth potential in areas of short board supplementation. Secondly, gold mining in AI To B scenarios, including government AI, enterprise digitalization, military AI, medical AI, and financial AI, will focus on computer leaders, as well as consumption electronics, media, and Siasun Robot & Automation related to AI + consumer entertainment. Global capital flows are gradually transitioning from the previously crowded tech hardware towards AI applications. Second, along the AI+ main line, diffusion will occur towards non-AI technology, where hard assets in the non-AI technology sector will undergo old trees blooming anew and revaluation of value. It is important to emphasize that this round of diffusion is not being driven by traditional macro policy stimuli leading to revaluations of old assets, but rather around new quality productive forces and empowerment from AI technology. In the future, excellent companies in the non-AI technology field will also achieve old trees blooming anew propelled by AI transformation, efficiency enhancement, and industrial upgrades, becoming assets that combine value safety nets and growth elasticity. As AI applications continue to diffuse, the direct or indirect beneficiaries will extend to industries such as pharmaceuticals, particularly innovative drugs, non-ferrous metals (gold, copper, etc.), brokerages, and export chains (power equipment, machinery, chemicals, and new materials). In the longer term, the investment framework for the Chinese stock market can be summarized as understanding trends, following policies, and recognizing value. Firstly, grasp the two long-term trends of global order restructuring and the AI technology revolution; secondly, seek areas where resources are continuously concentrated around the 14th Five-Year Plan, new quality productive forces, and industries involving Artificial Intelligence +; ultimately, it will return to the value itself, assessing the long-term growth of enterprises' profitability, cash flow generation capacity, and the sustainability of future growth. Currently, what is truly worth positioning is the less crowded areas that can benefit from the empowerment of AI and ultimately revenue and profit growth.