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Market Review

In October, U.S. risk-free interest rates increased, while risk premiums declined, reflecting the market's view that recession risks are diminishing. At the same time, the upcoming election and potential policy adjustments add uncertainty, which in turn can increase risk premiums. On one hand, concerns over a recession are easing, while on the other, election-related uncertainties loom. Overall, these factors combined have led to a reduction in market-traded risk premiums, with current levels among the lowest since 2002-2022 (in the top 25% range). Although the market has likely priced in both positive and negative factors, the extent of this pricing is uncertain, so we are adopting a wait-and-see approach.

Q3 earnings reports have started to roll in, and here are some of our observations:

• Tech Giants: Overall performance is solid. Both Google and Amazon exceeded revenue growth expectations, with an acceleration in growth rates. Meta demonstrated resilient revenue growth, maintaining above 20%. Although Microsoft did not meet market expectations, this was largely due to heightened market anticipation around Microsoft AI, while AI-related Azure and M365 revenue growth showed a slight slowdown. Microsoft’s overall revenue growth remains steady at 16%. The temporary slowdown in Azure and M365 is mainly due to engineering implementation and mismatched input-output timelines, but the potential and competitiveness remain intact. Additionally, major companies are still heavily investing in AI; if current trends continue, each of the four tech giants may invest $50-60 billion in AI and related infrastructure.

• Consumer Sector: With inflation receding, price-driven growth has significantly weakened, yet overall consumer demand remains resilient. For example, Visa and Mastercard reported accelerating U.S. payment volume growth year-over-year (with even stronger growth in Europe). However, consumer performance varies structurally across sectors, development stages, and consumer segments. For instance, travel and hospitality saw stronger-than-expected bookings in Q3, with faster growth than Q2, largely driven by strong performance in Europe. This partly reflects robust spending by Americans abroad (currently exceeding pre-pandemic trendlines), while inbound spending from foreign tourists in the U.S. has yet to reach pre-pandemic levels. In the dining sector, McDonald’s U.S. same-store growth rebounded this quarter, while Chipotle reported 6% growth, but Starbucks saw a widening decline in U.S. same-store sales. In sportswear, Nike continues to struggle, while emerging brands like HOKA reported approximately 35% revenue growth, an acceleration from the previous quarter, prompting upward guidance for the year.

Market Outlook and Projections

Currently, U.S. risk premiums are at historic lows (2002-2022). While there may be some room for further declines in risk-free rates, the overall market discount rate is unlikely to decrease significantly. China's asset risk premium has also noticeably decreased, and we do not expect significant valuation increases until long-term issues are resolved. With China’s economic growth moderating, there is still some potential for risk-free rates to decline.

Our focus remains on finding alpha opportunities, driven by emerging industry trends, including AI, humanoid robotics, new consumer behaviors, and emerging markets. Here are two areas of particular interest:

• Humanoid Robotics: Progress may be faster than the market anticipates. Perception-recognition-execution capabilities, developed through autonomous driving, can be repurposed for robotics. Additionally, leading companies with access to the best application scenarios can gradually overcome data limitations. In factory settings, the economic case for humanoid robots is often more straightforward than for autonomous driving.

• Emerging Markets: Successful experiences in mature markets can often be replicated in various emerging markets. Due to differing national contexts, local leading companies can establish stronger competitive advantages and achieve higher profitability, and these markets remain underexplored.

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Opportunities

1. AI: A significant long-term alpha source, as human value increases, and AI enhances or even replaces human efficiency, positioning it as an area with vast potential.

2. Health and Self-Focused Lifestyles: This shift continues to create consumer opportunities.

3. Purchasing Power: Increased consumer purchasing power can drive up pricing for certain products/services, enhancing the relative competitiveness of high-value offerings.

4. Rate Cuts: If we enter a rate-cutting cycle, sectors previously constrained by rising rates might see opportunities, especially in industries with strong competitive positions and solid long-term growth potential, once short-term rate risks are mitigated.

5. Fintech: New opportunities in financial technology.

6. Emerging Markets: Opportunities in regions like Latin America and Asia.

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