As A-share markets navigated multiple style shifts and considerable volatility this year, the third quarter notably saw growth sectors experience sharp pullbacks following earlier gains. Since July, previously strong technology sectors like electronics and communications have undergone significant corrections, while dividend and pharmaceutical sectors, which had adjusted sufficiently in the first half, showed relative strength during this period.

Looking ahead to the fourth quarter, four seasoned public fund investment leaders offer their perspectives. They are Zou Hui, General Manager of the Equity Investment Department at Industrial Fund; Liu Yuanhai, Chief Investment Officer at Soochow Fund; Wu Hao, Director of the Research Department at CITIC-Prudential Fund; and Zhu Hong, Investment Director at Nord Fund.

Zou Hui highlights that given the fourth quarter's transitional nature, attention should turn to sectors with potential for fundamental reversals next year, including defense, pharmaceuticals, and AI applications. Liu Yuanhai believes the recent adjustment primarily reflects valuation compression and shifts in market sentiment rather than a fundamental reversal in corporate earnings trends. He suggests that opportunities may still outweigh risks through to early next year, though a broad rally is unlikely and structural characteristics will remain prominent.

Wu Hao notes increased overseas macro disruptions recently, with the Fed's rate hike concluded, geopolitical conflicts recurring, and oil prices rising, yet US tech assets have shown resilience. The relatively weak domestic market may be more related to micro-level trading structures and risk appetite changes, while the AI industry trend itself has not shown significant reversal. Zhu Hong expects market style to gradually become more balanced. As tech valuations fully digest and lagging sectors complete their recovery, the market will likely return to industry prosperity trends, company quality, earnings growth, and valuations.

Opportunities May Still Outweigh Risks Through Early Next Year

Zou Hui notes that the third quarter was the most challenging quarter for investment since September 2024. Looking to the fourth quarter, he believes the Fed's rate hike implementation will temporarily ease concerns about macro uncertainties. The tech rally continues, and the market may refocus on directions with confirmed earnings and industry trends. While the domestic economy faced significant pressure in Q3, the marginal impact on equity markets is expected to diminish.

Liu Yuanhai emphasizes that this adjustment reflects valuation compression and sentiment changes rather than a fundamental reversal in earnings trends. Excluding financials and the "Three Barrels of Oil," A-share earnings growth has improved from initial expectations, indicating earnings remain in a recovery process. With the Shanghai Composite Index back near 3800 points, approaching the lower bound of the past year's range, market safety margins have improved. Systemic downside risk is relatively limited, with Q3's rapid adjustment releasing some valuation pressure.

From Q4 through early next year, opportunities may still outweigh risks, though a broad rally is unlikely. After the value sector completed a valuation recovery in July-August, if fundamentals in banking, consumer, liquor, and petrochemicals don't improve further, the momentum for sustained value outperformance may be limited. Meanwhile, growth and tech sectors with corrected valuations, supported by industry prosperity and earnings growth, may regain favor by year-end.

Wu Hao points out that while overseas macro disruptions and geopolitical conflicts persist, US tech assets remain resilient. The domestic market's relative weakness likely relates to micro-trading structures and risk appetite changes. AI industry trends haven't reversed significantly. Domestically, structural divergence persists, with industrial value-added, retail sales, and fixed asset investment showing marginal weakness, PPI continuing to decline, and industrial profit growth slowing. Exports maintain growth but may moderate with a rising base. Policy continues emphasizing faster fiscal spending, with August PMI better than seasonal patterns. Cloud vendor spending, computing power, and optical communications industry prosperity deserve continued tracking.

Zhu Hong observes that Q3 saw a trend of oscillating adjustment and structural divergence. The sector rotation likely represents staged valuation rebalancing and chip restructuring in a range-bound environment, not an industry trend reversal. The core logic of AI iterative upgrades and national development of semiconductors and advanced manufacturing remains intact. Q3's adjustment was more about risk release from crowded trades and overextended valuations. Looking ahead, style should gradually balance as tech valuations digest and low-position sectors complete recovery, returning focus to industry prosperity, company quality, earnings growth, and valuations.

Focus on Defense, Pharmaceuticals, and AI Applications

Zou Hui prioritizes directions with industry prosperity and earnings certainty, primarily in hardware, encompassing both overseas and domestic computing power. Given Q4's transitional timing, he will watch for directions with fundamental reversal potential next year, including defense, pharmaceuticals, and AI applications. While the pro-cyclical domestic demand direction hasn't shown clear inflection points, he will closely track changes in sub-sectors.

Liu Yuanhai prefers tech growth directions with clear industry trends, order or revenue support, and potential earnings delivery, focusing on the AI computing power chain. Overseas AI computing power chains offer relatively higher certainty. Global cloud vendors maintain rapid AI capital expenditure growth, transmitting to servers, optical modules, and PCBs. After July-August adjustments, valuation pressure on core companies has been released while order and earnings trends haven't shown clear inflection points, warranting continued attention.

For domestic computing power, storage and related semiconductor equipment are more notable now. Domestic AI chips have long-term potential but face near-term constraints from HBM material supply and earnings delivery pace. Storage prosperity and semiconductor equipment localization offer clearer fundamental signals. Looking to next year, if supply constraints ease and orders and revenue materialize, domestic AI chips may present new opportunities. AI applications, including on-device AI, smart driving, humanoid robots, and internet platform AI transformations, deserve long-term attention, though most application companies' business models and earnings inflection points remain unclear. Broadly, new energy, power batteries, advanced manufacturing, and innovative drugs may offer structural opportunities, requiring evaluation of supply-demand improvements, earnings inflection points, and valuation levels.

Zhu Hong notes that China's economy remains in a phase of structural optimization and innovation-driven high-quality development. New economy sectors like AI technology, advanced manufacturing, and innovative drugs continue to receive strong policy support with broad long-term prospects. Following recent price corrections, some quality companies present good investment value. Consumer and dividend sector companies with strong free cash flow and high dividend yields have undergone prolonged adjustments, with prices at low ranges and pessimistic sentiment fully priced, creating potential for expectation recovery.

Wu Hao notes macro liquidity faces constraints, with markets likely experiencing continued oscillating pressure short-term, though medium-to-long-term industry trends remain fundamentally unchanged. For allocation, he continues tracking core assets with clear industry trends and emerging safety margins after corrections, while watching for opportunities from macro liquidity expectation improvements and strengthening comparison of distressed-asset reversal plays to identify fundamentals with improvement elasticity.

Watching Internal and External Uncertainties

Zou Hui identifies three key risks: potential surprise Fed rate hikes if the US-Iran conflict remains unresolved; liquidity impacts from Q4 IPO scheduling of several large model companies; and AI industry trends, including cloud vendors' cash flow, capital expenditure, EBITDA, and data center construction progress.

Liu Yuanhai focuses on two risks: oil price upside from geopolitical conflicts. If conflicts escalate or spread to major oil-producing regions, crude supply would face significant shocks, potentially pushing international oil prices above expectations. Oil is a crucial variable for global inflation; substantial increases would transmit through transportation and chemical chains to core commodity prices, potentially interrupting US disinflation or even triggering staged rebounds. This would directly affect Fed policy pacing. Diminished rate cut expectations, delayed easing cycles, and high oil price-induced fiscal deficit pressures would likely keep long-end Treasury yields elevated. Persistently high or rising 10-year Treasury yields could raise global asset pricing discount rates, suppress growth stock valuations, intensify emerging market capital outflows and currency volatility, and pressure global risk assets systematically.

Second, as AI model capabilities advance, market concerns about AI threatening human safety may grow, potentially slowing or delaying frontier model training and releases, impacting AI industry development trajectory. Slower model iteration could weaken confidence in large-scale AI application deployment and commercial monetization, pressuring earnings delivery and valuation support for related supply chain companies. Overall, he maintains a relatively positive stance on markets and tech industry trends but won't ignore growth sectors' high volatility. Portfolio management will persist with "industry trends plus fundamental verification," tracking industry prosperity, corporate earnings, valuations, and trading congestion while retaining dynamic adjustment flexibility.

Zhu Hong highlights external uncertainties from recurring geopolitical situations that may push up commodity prices. Trade barriers and supply chain access restrictions disrupting the global division of labor could intensify trade frictions. Domestically, the economy remains in structural transformation, with retail sales and consumer confidence data indicating relatively flat demand recovery. Market risk appetite may struggle to sustain elevation, and year-end profit-taking needs exist, suggesting markets may remain dominated by existing capital. In this context, high-holding-concentration, high-valuation sectors or stocks face adjustment risks if marginal industry positives slow or Q3 earnings disappoint.

Wu Hao tracks Fed policy pacing and expectation shifts, recurring geopolitical conflicts and oil trends, domestic economic structural divergence and subsequent data improvements, AI industry trends, and changes in overseas AI capital expenditure.