Newsletter commentary July 2025

The market sentiment is gradually shifting

In July, the market experienced a sustained rally, and by the end of the month, discussions around a bull market had become widespread. Within the month, trading was mainly focused on themes such as “anti-involution,” and computing power. Innovative pharmaceuticals, new consumption, and high-dividend stocks continued to undergo corrections. We have maintained a modest allocation to this month's heated sectors.

Globally, after the uncertainty around tariffs, markets initially responded positively to any mention of a tariff deal, reflecting an overly optimistic sentiment. However, the reality may prove to be more complicated. After all, tariff rates have risen significantly, and the real impact on many industries has yet to fully surface. So far, the burden of tariffs has largely been absorbed by exporters, importers, and distributors, with limited impact felt by consumers. As U.S. inventories normalize, price transmission effects are expected to gradually become apparent.

Tariff hikes ultimately reduce overall demand, yet major markets have already rallied beyond pre-tariff levels. It may appear that tariff issues are being resolved, but in fact, they haven’t been truly addressed. Only after tariffs are officially confirmed will the real industrial adjustments begin. Up to now, most responses have been short-term, such as rushing shipments, stockpiling, or absorbing costs without passing them on to consumers. Global investors may harbor a rather complacent sentiment towards markets like the United States. Moreover, Trump’s erratic policy shifts — now seen as par for the course — add to the uncertainty, and he seems to take a certain pleasure in that unpredictability.

“Anti-involution”in China has become a trending topic lately. If we view it within the broader framework of building a Unified National Market, it may offer even more interesting insights. The concept of a Unified National Market has been repeatedly emphasized in recent times and is likely to serve as a key pillar in the next phase of reform — we’re still in the process of studying it. As this initiative progresses, it is expected to reshape many dynamics, altering the behavior of market participants. Local governments and enterprises may need to adapt their long-standing practices in investment promotion and business operations. (For instance, even the recent resumption of VAT on newly issued government bond purchases could be interpreted as part of the push toward market unification.) This move should improve resource allocation efficiency and support the growth of leading enterprises.

If we tie this together with the upcoming 15th Five-Year Plan, we may begin to see a clearer picture of what’s ahead. The anti-involution narrative is particularly relevant for industries facing oversupply or intense competition. However, to date, efforts to combat involution have mostly played out within existing market mechanisms. Many sectors and players are exploring market-oriented ways to break out of the cycle, and while there is no definitive solution yet, the question is now squarely on the table. Ideally, under a more unified market structure, investment visibility and predictability should improve significantly.

Moreover, competition itself may be a way to break the cycle of involution. Take the food delivery industry, for example: although current competition appears more intense (“more involuted”), it could eventually reshape the market from a single dominant player into a more balanced and harmonious structure between merchants, delivery workers, and platforms.

As for computing power investment, recent trends show a rapid surge in token counts driven by various applications. Some top-tier companies are already seeing validation of this trend in their business and revenue streams. More people are starting to use AI models, and usage is becoming increasingly intensive. That said, capital expenditure plans of major cloud service providers (CSPs) are now starting to approach the limits of their profitability. What comes next, whether it’s a breakout in revenue and profit driven by aggressive investment, or a scaling back of capital spending, remains uncertain. This could be a matter of belief, or even a global experiment involving all of humanity. In any case, it’s something we should strive to study and observe closely.

Stablecoins represent both a bridge and a compromise between the crypto world and the real world. Many foundational principles of decentralization have already been altered, while at the same time, there are also exaggerated narratives surrounding the capabilities of stablecoins, as if they can function free of the real-world frictions, such as financial KYC requirements. In reality, if traditional financial institutions disregarded KYC, they too could be much more efficient.

What’s certain is that, with strong backing from the Trump administration, the crypto industry has crossed a critical threshold. Players from traditional finance, driven by FOMO (fear of missing out), have rushed in, which in turn, has only amplified the FOMO sentiment. This marks a period of dramatic change, all within just the past six months. It’s something we must study seriously. Even if some things may ultimately prove to be wrong, they can remain “wrong” for a long time, and at this stage, we can’t be sure whether they are right or wrong at all.

Following the tariff war in Q2, the market has clearly adopted a more balanced mindset. This shift helps stabilize and support valuations. Many underlying issues are indeed not easily resolved in the short term, such as cautious expectations from businesses and households, low inflation, and the persistent downturn in real estate. However, people are starting to see some bottoming out and sources of confidence. Meanwhile, new developments are still being created. As a result, investor sentiment is gradually changing.

In a market that faces structural challenges but also possesses a clear bottom, different strategies can thrive. Over time, savings that earn barely 1% interest will begin to shift attention back to equities. In the past, we focused primarily on public mutual funds as the bridge for this transition. With the rollout of high-quality development measures, this bridge may now become more effective in converting savings into investment. In addition, insurance companies, especially with the rise of dividend-paying policies and reforms in bancassurance distribution channels, may emerge as another important bridge for channeling household savings into the market.