Market strategist Zhang Yidong has distilled his current market outlook into a simple phrase: "The space has arrived, but the time has not." In terms of price movement, the main downtrend for July has concluded, and the correction has reached a bottoming zone. However, from a timing perspective, the "summer chill" still has lingering effects, and he advises against chasing highs in August, recommending instead patience for contrarian positioning. Hong Kong stocks offer decent value, and AI applications are the key theme for the second half of the year. These were the core insights shared by Zhang, a well-known economist, during a program on August 7th.

Zhang outlined several key points. First, the primary impacts from "gray rhinos" and "black swans" have largely been completed in July, but their aftershocks will continue to suppress the start of the autumn rally. He cautioned against going "from the emergency room straight to a wild party." August is not for chasing highs, but for a strategic bullish outlook combined with tactical selection of new narratives. Second, the second half of a bull market cannot continue trading old ideas under old logic. Capital is smart and will seek out areas of positive surprise. For the second half of the year, across A-shares, Hong Kong, and global markets, the only new narrative is AI applications—the empowerment of every industry by artificial intelligence. Third, the time to position in Hong Kong stocks has arrived, as they currently offer good value for value investors. Investors can use August, when overseas gray rhinos and black swans may still cause disruptions, to build positions steadily and patiently, avoiding the impulse to chase highs or fear missing out. The market won't move that fast. Fourth, August is precisely the time to build positions for the autumn rally. This rally is not a large B-wave rebound within a bear market, but the beginning of the second half of a bull market. Fifth, the AI market rally in 2028 is likely to face a "catastrophe," potentially a major crisis if not the end of the bull market itself.

The "summer chill" may have lingering effects in terms of time, but in terms of correction space, the market is at a bottom. In June, Zhang predicted the "summer chill." Now in August, he believes the window for contrarian positioning for the autumn rally is emerging. He analyzed whether the market has confirmed a reversal, noting that Chinese markets are stabilizing ahead of overseas markets. At the start of May, his forecast for the year was an N-shaped pattern—a rally in May, a pullback in June and July, and a gradual upward move starting in August. By July, Chinese markets were the first to stabilize. The Hong Kong market, which began adjusting in mid-May, stabilized first in late June/early July, followed by the A-share market around July 20th. In contrast, the Nasdaq, Korean, and Japanese markets only began to bottom out in late July. This suggests the correction and stabilization were fundamentally about liquidity, both macro and micro. The sell-off in June and July was driven by micro liquidity issues—reflexive effects from excessive crowding and leverage, with the epicenter in Korea. The Korean market’s sharp correction caused contagion globally, especially in tech-related indices. Interestingly, the Hong Kong index had been weakening since March due to a drain from the AI rally. From March to June, capital crowded into upstream hardware, creating an unhealthy micro liquidity environment. This was the basis for his forecast of a "summer chill." The trigger was macro liquidity tightening, with US long-term bond yields remaining high. When macro conditions tighten and micro conditions are over-crowded, a stampede is inevitable. The trigger was a questioning of computing demand. The correction was sufficient in terms of the reflexive impact from over-crowding. The least crowded areas bottomed first (Hang Seng Index), followed by the Shanghai Composite and CSI 300, and then the Nasdaq. The conclusion is that while the "summer chill" may have some lingering effects in time, the market is at a bottoming zone in terms of price. Determining a reversal vs. a rebound depends on fundamentals, but the bottoming zone is confirmed by liquidity analysis.

The core trigger for the N-shaped third leg is the collapse of the old narrative and the establishment of a new one. If the third leg of the N-shape is just a rebound, the trigger would be a deep oversold bounce, driven by improved liquidity. However, Zhang believes the probability of a large B-wave rebound is low. He thinks the trigger is a new fundamental narrative that fosters a reversal. The main impact has already been completed in July, so August is not for chasing highs but for a strategic bullish outlook and finding new narratives.

Regarding overseas risks, Zhang noted that the primary "gray rhino" (US long-term bond yields rising) and "black swan" (Korea's crowded trade deleveraging) have had their main impacts in July. The risk of further deleveraging in Korea persists, but it is now self-contained and could even present buying opportunities if it causes short-term disruptions in other markets. The gray rhino of US bond yields could still surprise to the upside, potentially reaching 4.8-4.9% or even 5%, which would pressure risk assets temporarily. The conclusion is that the main impacts are over, but aftershocks will suppress the initial phase of the autumn rally. The market needs a new narrative, not the old one from the first half of the year. August is for being strategically bullish but tactically searching for new narratives.

The new narrative for the second half of the bull market is AI applications. The old narrative of upstream hardware pricing power is over. The second half of a tech wave is about applications, not infrastructure. The cost of AI has fallen, and the door for AI applications is wide open. The new narrative is a shift from hardware to applications. The next 1-1.5 years are likely the second half of the AI industry and a new phase of the AI bull market, led by AI applications. This includes enterprise B2B applications (medical, government, finance, corporate IT), AI + entertainment (media, consumer electronics, smart terminals), and AI + overseas expansion. The new main theme is gestating. August, amidst lingering black swan/gray rhino disruptions, is the time to build positions for the autumn rally. The autumn rally is not a bear market B-wave rebound, but the start of the second half of the bull market, led by the new narrative of AI applications.

The AI investment logic differs between China and the US. In the US, AI serves capital (profit-driven, closed-source, paid applications). In China, AI serves the people (as a new productive force, empowering the economy, open-source). Investment logic should not be directly compared. For the US, applications (especially B2C) will break through sooner. For China, applications (especially B2B, like finance, government, medical, industrial software) will commercialize faster. The supply chain will see a profit redistribution from upstream hardware to downstream applications. For the US, the Nasdaq may outperform the Philadelphia Semiconductor Index. For China, two areas are key: 1) domestic shortage areas with national support (e.g., advanced semiconductors), and 2) application sectors, particularly B2B areas like finance, government, and medical, which have local scenarios, data security requirements, and compliance barriers. The AI wave is becoming more integrated into workflows, moving from experimental to essential.

Zhang warned that the AI market rally in 2028 is likely to face a "catastrophe." He reasoned that AI must serve humanity. A backlash against AI is brewing, especially in the US, where the concentration of wealth and job displacement are creating social resentment. By 2028, there could be a significant "carbon" (human) backlash against "silicon" (AI), potentially leading to regulations that could severely impact the market. He emphasized the need for AI to serve humans and for society to adapt to the AI era, but not to become servants to it. The era of core assets is shifting, and investors should not cling to old consumption patterns like baijiu but instead focus on new demands driven by AI, such as companion robots or AI-enhanced healthcare.

The time to position in Hong Kong stocks has arrived. In the second quarter, Hong Kong was hit by three "cash drains": capital flowing to other tech hardware markets, IPO and lock-up expirations, and domestic investors rotating back to the A-share market. All three factors are reversing. The correction in the US/Japan/Taiwan/Korea markets has improved Hong Kong's relative value. New regulations have reduced the impact of new listings and lock-up expirations. A-share investors are rediscovering Hong Kong's value. In the second half, Hong Kong offers more choices in the AI application theme, which is the new narrative. Hong Kong’s market is more tilted towards software and internet plays, which are well-positioned for this shift. The overall value proposition for Hong Kong is good for value investors. They can use August, amidst potential overseas disruptions, to build positions steadily without chasing highs. The market won't move that fast.

Regarding the spread of the market rally, Zhang believes it will be driven by AI applications, not macro easing. The "star fire" can spread in two ways. One is a traditional macro-driven rally from monetary easing, which is unlikely given high debt levels globally. China is focusing on "strengthening fundamentals," not massive stimulus. The spread will be around new productive forces (AI). The direction of spread is around AI applications (B2B, government, enterprise, military, healthcare, finance). It also includes traditional industries that adopt AI. There will be a differentiation within the tech hardware sector. If the AI bull market continues, the best upstream leaders may consolidate and slowly rise, but many speculative stocks have likely peaked. The money will shift from crowded hardware to applications. In the second half, A-shares should focus on new stocks and IPOs, while Hong Kong should focus on AI applications. The government's "equity finance" era has begun, where successful tech investments by local governments, like the ChangXin project in Anhui, are now paying off. This will drive activity in the IPO and M&A space. The key theme is AI applications outperforming, globally. Hong Kong has a unique advantage in being cheap, but investors must avoid value traps and focus on genuinely good companies that are undervalued, particularly in resources (gold, copper, aluminum) and staple-specific cyclical sectors.

Zhang’s final advice for investors is nine words: "Recognize the big picture, be politically aware, and focus on value." First, recognize the big picture: great power competition and the AI-driven tech revolution. Second, be politically aware: in China, investment should align with the state's strategic industrial directions, like the "AI+" initiative. Third, focus on value: avoid overpaying, even for good themes. Value is about long-term discounted cash flows, not just a low P/E ratio. For ordinary investors who cannot identify value, long-term strategies like ETF dollar-cost averaging are recommended. The core message is to look for new narratives, which are deeply rooted in AI applications, and patiently build positions in high-quality assets at reasonable valuations.

[This article is reproduced from "Investment Workbook."]