Operation review: Increase in holdings of consumer goods and U.S. Treasuries, decrease in individual AI hardware holdings, with a re-allocation towards AI applications.
This month, the risk-free rate of return in the United States has noticeably increased, leading to a downward shift in the valuation center. Therefore, some companies that have insufficient investment returns due to large price gains or fundamental adjustments have been reduced in holdings. This includes the continued reduction of AI hardware stocks that have experienced price overshooting in phases, and internet stocks whose price gains have decreased their IRR attractiveness. However, at the same time, we increased our holdings in consumer goods with higher IRRs and in internet stocks whose investment returns have increased due to price declines. In addition, considering that the yield on 10-year Treasuries has reached around 5%, with very limited upside potential, we also increased our allocation to long-term U.S. Treasuries. Overall, the portfolio still maintains a high position, with a slight reduction in stock positions and a slight increase in bond positions. Industry concentration is in cloud computing, semiconductors, the internet, branded consumer goods, etc., still maintaining a 40-50% allocation in AI. Overseas assets (excluding U.S. Treasuries) maintain a proportion of about 80%.
Market review: Domestic policies ensure the baseline is maintained, while high interest rates in the U.S. increase market volatility.
Domestically, the solution for local debt resolution has become clearer, with the transfer of debt from local to central levels and the reduction of interest rates through debt swaps. This likely ensures that the baseline of no systemic financial risks is maintained. On the other hand, the central economic policies are currently focused on bottom support and risk prevention, which mainly serve to bolster the economy according to industry data. For most sectors with sufficient market competition, the scale of the industry hasn't changed much, or the growth has slowed. However, supply growth is faster and competition is fiercer, leading to a decrease in industry profitability. Only a few truly competitive companies can maintain or even expand their profit margins against the trend.
In the U.S., the yield on 10-year Treasuries rose from 4.5% to nearly 5% within the month, only to fall rapidly back to 4.6% in November. High interest rates indirectly affect stock valuation centers, increasing market volatility. Additionally, for sectors that rely on borrowing for consumption, such as housing and automobiles, the high interest rates have decreased purchasing power and suppressed demand. Companies that rely on debt financing face increased risks of refinancing and higher capital costs. However, it's also important to note that the high interest rates indicate an economic resilience that is better than expected. For instance, the Q3 GDP shows "re-acceleration," driven by strong consumption under low unemployment rates and increased government spending. Furthermore, the impact of high interest rates varies greatly among different industries and companies, with those having less debt and more competitiveness being less affected.
Market Outlook & Investment Strategy
Domestically, the viewpoint remains unchanged: the likelihood of a rapid economic downturn and risk of loss of control have significantly decreased, yet the medium to long-term issues of economic deceleration and balance sheet contraction remain difficult to resolve. With economic growth slowing, profit performance will worsen due to intensified competition across many industries. Continuous anti-corruption efforts by various industries and government departments, as well as policy interventions in market pricing, will still disrupt long-term visibility and pose challenges to asset pricing. Until these long-term issues are resolved, it is unlikely that valuation centers will stabilize. Therefore, we remain relatively cautious about overall domestic investment opportunities, demanding a higher risk premium on valuations and fully considering the effects of a lowered economic growth center, intensified internal competition due to slower growth, and the impact of balance sheet repairs by local governments, residents, and businesses. However, with policies supporting the bottom line and market expectations lowered, companies that genuinely have a competitive edge and can expand against the trend can be viewed more optimistically.
For overseas investment opportunities, the outlook is relatively more optimistic. After the risk-free rate has reached levels of 4.5-5%, the risk has significantly decreased, mainly due to longer-term issues. Therefore, the risk of downward valuation center in subsequent markets is reduced, with a primary focus on the fundamentals of businesses. Structurally, there are opportunities in technology and consumption. AI may see new developments as companies gradually enter commercialization in Q4; in the consumer sector, there are many structural opportunities within the overall resilient consumption, including new beverages and niche sports brands. Additionally, recent quarterly reports and guidance for Q4 suggest that sectors where demand was overdrawn during the pandemic and are now experiencing slowed growth or de-stocking issues are beginning to recover, including e-commerce and PC shipments. Coupled with cost reduction and efficiency improvements by companies, the improvement in profits becomes more evident, which may present new opportunities.
The focus of current investment strategy seems to be on sectors with structural growth opportunities and those benefiting from technological advancements and consumer trends. Here is a summary of the key directions:
AI: Seen as the most important growth opportunity for the future, investments are currently centered on semiconductors and software, with a watchful eye on the development of other application areas.
Semiconductors: There is a structural growth opportunity in semiconductors, particularly in advanced processing technologies and high-performance computing, with AI expected to accelerate growth in the sector.
Overseas Cloud Computing: The investment focus is on cloud computing services that serve large enterprise customers and operate in competitive niches. The combination of these services with AI has the potential to increase efficiency and user value.
Overseas Travel and Tourism Services Platforms: There is an opportunity to invest in platforms that benefit from the increased share of personalized travel and tourism services.
Consumer & Internet: There are investment opportunities in consumer and internet sectors that align with generational consumer trends, meet fundamental consumer needs, and have the potential for increased market share and faster growth, especially the leading companies in specific segments.
Domestic Services: The service industry in China, exemplified by professional education, is expected to continue its stable growth, revaluation, and provide consistent dividend opportunities.
These directions indicate a strategic approach that leans towards innovation-led sectors, services with a high growth potential, and areas that are adapting to or leading in the new digital and consumer landscapes.
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