Why Chinese brokers forecast an A-share tech and chip rebound

A number of prominent Chinese brokerages have expressed confidence in the prospects of domestic tech shares in the coming weeks, contrasting this outlook with the significant sell-off observed in South Korean financial markets. Citic Securities, the country's second-largest brokerage by total assets, indicated that the recent sharp decline in A-share tech stocks was primarily a correction rather than the devastating deleveraging shock experienced in South Korea.

"While some liquidity pressures persist in certain sectors, the impact on noncore AI shares has largely dissipated," stated the brokerage in a recent note.

The warnings came in the wake of a sell-off in semiconductor shares during July, as investors took advantage of the significant gains in chip stocks. Despite a recent rally, the Korea Composite Stock Price Index (Kospi) experienced a 22 percent decrease in monthly value, marking its steepest decline since the global financial crisis. China's CSI 300 Index also saw a 7.9 percent decline during the same period, while the S&P 500 Index in the United States fell by 0.1 percent, marking its worst July performance since 2014.

Asian trading on Monday saw the Kospi fall over 5 percent, while China's CSI 300 Index dropped by 0.98 percent and the Hong Kong Hang Seng Index edged up by 0.48 percent. Looking towards the future, Citic Securities forecasted a high likelihood of a broad recovery in A shares, urging investors to concentrate on specific tech stocks and to increase their investments in energy, chemicals, non-ferrous metals, non-bank financials, and innovative pharmaceuticals.

Similarly, China Securities, the nation's eighth-largest brokerage, suggested that irrational panic selling had likely concluded. They also pointed out that the congestion in the A-share market was easing, anticipating that trading would return to focusing on corporate earnings and company fundamentals in August. They recommended the AI computing power, semiconductor equipment, non-ferrous metals, new energy, and machinery sectors.

Huatai Securities, another leading Chinese brokerage, also noted that tech shares might soon reach a floor, citing signs of US hedge funds and South Korean leveraged funds withdrawing from extreme positions. Although selling pressure had remained a factor recently, it had ceased to dominate, according to Huatai Securities. They identified the second half of August as a critical period to determine if the tech sector would undergo a significant rally, given the close attention investors are paying to the results of Nvidia and other semiconductor companies.