CICC: External disturbances have triggered a short-term adjustment, but the repairing trend is still expected to continue.

CICC has released a research report stating that the A-share market experienced a significant correction on August 19, with the Shanghai Composite Index's year-to-date return turning negative once again. The market correction was mainly triggered by multiple unfavorable external factors: a weakening AI narrative raising concerns about "debt dependency," the rising yields on long-term government bonds in several major countries, and the US-Iran conflict suppressing risk appetite. CICC believes that in the short term, we should wait for improvements in external narratives and liquidity, which are expected to sustain the market's recovery trend. It is recommended to focus on two main lines: 1) AI infrastructure-related sectors, such as optical communications and PCBs, along with many innovative drug companies entering the clinical data validation stage, warranting bottom-up attention. 2) Sectors such as power grid equipment, petrochemicals, construction machinery, and non-bank financials that benefit from a favorable capital market. The fundamental recovery progress in pure domestic demand industries remains relatively slow and requires further observation. CICC's main points are as follows: The A-share market has experienced a notable correction, with the year-to-date return of the Shanghai Composite Index turning negative again. Affected by overseas disturbances, the Asia-Pacific market saw a general decline on August 19, with the Korean market suffering significant losses. The A-share market also experienced a clear correction, with the Shanghai Composite Index down 2.4% in a single day, returning to a negative year-to-date return. The large-cap blue-chip indices such as the Shanghai 50 and CSI 300 fell by 1.5% and 2.9% respectively, while the growth and small-cap indices saw larger withdrawals, with the ChiNext Index and STAR Market 50 dropping by 6.3% and 6.9%, and the CSI 1000 and CSI 2000 down by 5.4% and 5.6%. At the industry level, most sectors declined, with only the more defensive sectors of banks, oil and petrochemicals, and coal exhibiting slight gains. Sectors related to technology and growth performed poorly, with electronics, telecommunications, and machinery among those with the largest declines. The market correction was triggered by multiple external unfavorable factors. Specifically: 1) The negative narrative surrounding overseas AI has increased again. Reports indicate that by the end of July, Anthropic's annual revenue run rate (ARR) surpassed $65 billion, more than 7 times that of the end of 2025, but this is relatively low according to third-party tracking, and there are signs of a slowdown in monthly growth, leading to investor concerns about second derivative slowdowns. Additionally, to support the construction of AI data centers and the expansion of computing power in the US, the issuance scale of investment-grade bonds has continued to grow. By August 17, the issuance of US investment-grade bonds in August reached $145.2 billion, maintaining a high issuance pace, and investor concerns about AI-related debt dependency are also rising. 2) The yields on long-term government bonds in several major countries have risen. On August 18, the yields on 10-year and 30-year US Treasury bonds reached highs of 4.7% and 5.3% during trading. On one hand, the financing plan released by the US Treasury Borrowing Advisory Committee in early August indicated a significant increase in net issuance of US Treasuries in the third and fourth quarters of 2026, with $739 billion and $628 billion respectively, suggesting an increase in supply pressure. On the other hand, since Powell's appointment, market expectations for Federal Reserve interest rate hikes have been volatile, and inflation expectations are also part of the factors pushing long-term US Treasury yields up. The rise in Treasury yields directly suppresses the valuations of long-duration growth sectors, and there are also concerns that AI leaders are beginning to take on large-scale debts, which would raise the financing costs for AI companies. As a result, global risk assets plummeted, with the Nasdaq Index and Philadelphia Semiconductor Index falling by 1.3% and 5.0% respectively on the evening of the 18th, and the Japanese and Korean stock markets experiencing significant corrections on the 19th, creating a certain contagion of risk sentiment for AI stocks. Moreover, apart from the US, yields on government bonds in Japan and major European countries have risen to historical highs recently, with Japan's 10-year government bond yield increasing to 2.93%, the highest in nearly 30 years, while the 10-year Treasury yields in the UK and France have reached new highs since 2008, and Germany has hit a new high since 2011. 3) The US-Iran conflict has once again intensified, suppressing market risk appetite. On July 24, Trump stated that the US had re-implemented a maritime blockade against Iran. As of August 17, the 60-day negotiation window set by the memorandum had expired, with significant differences still existing between the two parties, constraining global risk asset performance. 4) The A-share market's own trading structure still needs repair. Since August, A-share mid and small-cap styles have continued to rebound, with the CSI 1000 and CSI 2000 accumulating increases of 15% and 18% by the 18th, recovering more than half of their previous declines, and there is short-term pressure for profit-taking. In addition, recently released economic and financial data shows that the current domestic divide between old and new driving forces is widening, and the rebalancing of styles between emerging and traditional sectors is not easy. In the short term, we should wait for improvements in external narratives and liquidity, with the A-share market's recovery trend expected to continue. CICC believes that in terms of AI industry trends, the current market's core doubts about the AI industrial chain mainly relate to insufficient revenue generation and sustainable monetization capacity of large models, as well as the enduring high computing power costs significantly suppressing industry profit levels. From a volume and price perspective, the market may be underestimating the growth in AI demand and improvements in model and hardware performance, and the leverage of leading companies remains low, indicating that the industrial trend is likely to continue. Regarding overseas liquidity, we believe that US inflation may enter a downward trajectory in the second half of the year, and economic growth is cooling, which does not support monetary tightening, leading to a possible overestimation of interest rate hike risks. Concerning US Treasury yields, on one hand, in terms of the issuance structure, the overall issuance is mainly short-term, posing limited supply pressure on long-duration bonds; on the other hand, the sustained high level of long-term yields will increase the fiscal burden on the US, suppressing economic performance, which gives the government strong incentives to respond. Combining the above analysis, we believe that several external narratives affecting the market are still relatively short-term and phase-specific, and the recovery trend in the A-share market since late July is still expected to continue. In terms of positioning, under external shocks, market volatility has increased, and the dividend style regained an advantage on the 19th. As market risk appetite gradually recovers and the peak performance period approaches, we recommend focusing on sectors and companies with strong earnings certainty. Attention should be paid to two main lines: 1) Selections need to be meticulous in bright growth sectors: after adjustments, the tech sector's crowding has significantly decreased. Industries with sufficiently high prosperity can achieve high growth on the numerator side to offset the drag on the denominator side, particularly in AI infrastructure-related areas such as optical communications and PCBs, which remain strongly assured at high prosperity status this year. Many companies in semiconductors and computing power still need to focus on the alignment between fundamentals and valuations, as tech growth may exhibit differentiated trends going forward; many innovative drug companies are entering the clinical data verification stage, warranting bottom-up attention. 2) Cycle improvements: An increasing number of sectors are experiencing a fundamental rebound from the cyclical low. We recommend considering the geopolitical situation and the position of capacity cycles comprehensively, focusing on the areas of improving performance and supply-demand patterns, such as power grid equipment, petrochemicals, construction machinery, and non-bank financial sectors benefiting from a favorable capital market; the non-ferrous metals sector is also worth attention after considerable adjustments. The fundamental recovery progress in pure domestic demand sectors remains relatively slow and requires further observation.