1. Operational Review: Maintaining a High Position, Little Structural Change
In November, a high position was maintained with little structural change. Industries remained focused on cloud computing, advanced semiconductor processes, the internet, and branded consumer goods. Overseas assets (excluding U.S. Treasuries) maintained around 80% of the portfolio, with AI investments constituting over 40%.
2. Market Review: Rapid Decline in U.S. Treasury Yields, Rising Expectations for Interest Rate Cuts
Domestically, the overall trend continued. On the one hand, continuous policy measures were introduced to resolve local debt and real estate issues, controlling the risks of economic deceleration and instability. However, on the other hand, there was no significant improvement in real estate sales and consumption, leading to insufficient overall growth momentum. Despite this, there were bright spots at the micro level. For example, shopping platforms offering extreme cost-effectiveness in line with the trend of consumption downgrade maintained rapid growth. Internet companies shifted from pursuing scale and high growth to improving quality and efficiency, thereby continuously enhancing profitability. In the automobile industry, where demand weakened and competition intensified, some companies managed to continuously increase market share and maintain good profitability, showing significant alpha. In the U.S., October inflation continued to decline, with core PCE adjusted annually from 3.7% to 3.5% in October, and monthly from 0.3% to 0.2%. Despite Powell's reluctance to consider the timing of easing policy, the market has moved ahead, with 10-year Treasury yields falling rapidly from 4.88% at the end of October to 4.22% in early December, and market expectations for the earliest interest rate cuts moved to March next year. The rapid decline in risk-free rates was a major driver of the overall rise in U.S. stock markets in November. If inflation remains at the current level, annualized inflation could fall to 2%, allowing risk-free rates to drop to between 3-4%, further driving market growth. Additionally, Q3 financial reports revealed some trends: 1) Areas that had previously overspent during the pandemic or experienced double booking due to supply chain bottlenecks are returning to normal growth after normalizing demand and de-stocking, including PCs, data center servers, e-commerce, etc.; 2) Sectors highly dependent on borrowed money for consumption, especially discretionary durable goods like automobiles, saw weakened purchasing power due to high interest rates, with sales starting to weaken in October; 3) AI is gradually having a positive impact in the enterprise service sector, with cloud service companies providing AI services accelerating or stopping their slowdown, and SaaS platforms launching AI products at significantly higher prices than traditional products, with positive customer feedback.
3. Market Outlook & Investment Strategy
Domestically, the previous view is continued, with the probability of rapid economic slowdown and risk of loss of control significantly reduced. However, the medium to long-term problems of economic slowdown and balance sheet contraction are difficult to resolve. In a slowing economic environment, many industries will see intensified competition and poorer profit performance. Continuous anti-corruption efforts and policy interventions in market pricing by various industries and government departments will still interfere with long-term visibility, making asset pricing difficult. Therefore, we are still relatively cautious about domestic investment opportunities, requiring a higher risk premium on valuations, and fully considering the impact of economic growth center downshift, intensified competition, real estate and local debt risks, and the repair of household and corporate balance sheets when valuing companies. However, we do see some good companies maintaining differentiation, exploring new growth points (such as going overseas), and excelling in cost control, such as leading cost-effective e-commerce companies. With policy support at the bottom and reduced market expectations, we can be relatively more optimistic about individual excellent companies.
We are more optimistic about overseas investment opportunities. The current rate of over 4% is still relatively high compared to the medium to long-term nominal economic growth rate (especially after the rapid decline in inflation). The economic resilience will be relatively strong due to good employment and increased investment demand from supply chain restructuring. In the medium term, there is still some room for a slight decline in the 4.2% 10-year Treasury yield, which would stabilize or even further reduce valuation systems, benefiting stocks. From a structural perspective, there are opportunities in technology and consumption. The technology sector has more opportunities due to AI, and further progress is expected in AI in enterprise services. Business digitization, remote work, and AI applications will rapidly increase security needs and complexity, leading to industry concentration and significant benefits for industry leaders. There are also many structural opportunities in the consumer and internet sectors, including travel platforms, new chain restaurants, new beverages, and niche sports brands.
The current focus areas include:
AI: This is the most important growth and structural opportunity for the future, currently including semiconductors and software, while also paying attention to other application-end developments;
Structural growth opportunities in semiconductors, mainly optimistic about advanced processes and high-performance computing-related semiconductor opportunities, with AI expected to accelerate industry growth;
Overseas cloud computing investment opportunities. Optimistic about serving large enterprise customers in niche markets with good competitive landscapes; combining with AI is expected to improve efficiency and user value;
Overseas travel service platforms: Benefiting from the increased share of personalized demand in travel;
Consumption & Internet: Investment opportunities in segment leaders that fit the trends of the times, solve fundamental consumer needs, have the potential to increase market share, and grow faster;
Other directions include global supply chain restructuring, robotics, Apple XR, and opportunities for Chinese companies going overseas, which will also be actively researched.
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