On Monday, the Shanghai and Shenzhen markets showed a volatile rebound, with the technology sector, which had seen significant corrections, posting a substantial recovery. Sectors like humanoid robots also performed in turns, signaling a clear boost in market sentiment. This confirms my earlier view: the Federal Reserve's September rate hike was the final piece of bad news, and its conclusion serves as a key catalyst for a market rebound.
The third quarter witnessed a considerable deleveraging process in tech stocks, as many leading technology companies underwent corrections and have now reached valuations that may offer attractive entry points, potentially setting the stage for a rebound. The tech sector appears to have significant room for recovery, and the fourth quarter is poised to unfold as a phase of volatile rebounds and valuation restoration. A fresh wave of rally is likely to gradually develop, and investors are advised to maintain confidence and patience, seizing the opportunity by positioning in oversold tech leaders and quality blue-chip stocks at lower prices.
This rate hike by the Fed was both expected and unexpected. It was expected because inflationary pressures in the US persist, with core CPI and PCE data indicating that price pressures have not fully subsided, necessitating further tightening. It was unexpected because there was prior market divergence on the policy path. The Fed's move to raise the federal funds rate target range to 3.75%-4.00% has further increased financing costs and pushed up US Treasury yields. While this hike adds to the burden on US businesses and increases the government's debt servicing pressure, the market may actually find room for a rebound once all the negative news is priced in.
During the tech stock surge in May and June, I advised investors to curb greed and take profits in a timely manner to avoid the sharp correction that often follows an overcrowded trade. However, since we cannot predict the exact turning point, a strategy is essential. My "three-step" strategy is to resolutely deleverage, reduce positions to half, avoid betting on a single sector, and maintain a balance of one part tech and one part dividend-paying stocks. Strictly adhering to this could have mitigated losses during the third-quarter correction. When tech stocks fell, dividend stocks rose, providing a hedge against risk.
When the market dropped, many panicked, claiming a bear market had arrived, but I have consistently maintained that a decline presents opportunities, not risks. Risk is born from rising prices, and opportunity from falling ones. After a drop, investors should overcome fear and consider accumulating quality stocks or funds that have been unjustly sold off, positioning for the next rally. Now that the rate hike uncertainty is cleared, the previously feared negative factor has transformed into a positive catalyst for this rebound.
Looking at the rebound's direction, tech stocks remain a focal point. Sectors like chips, semiconductors, computing power, and humanoid robots are all poised for a healthy recovery. Tesla has officially announced the installation of its first Optimus production line and expects to commence production soon, which will sustain market interest in the humanoid robot supply chain, though the specific production timeline should be based on official disclosures. The innovative drug sector experienced profit-taking after a strong surge in July. I mentioned at the end of June that tech stocks would undergo a bubble-squeezing process, and innovative drugs are a key investment theme to watch. National centralized procurement primarily targets mature drugs that have been on the market for years with high competition post-patent expiry, while innovative drugs are typically excluded, easing investor concerns. Furthermore, the semi-annual reports from innovative drug companies have been largely positive, especially for those with overseas business, which showed strong performance. From a valuation perspective, the sector is at a relatively low level after its correction. These factors collectively drove a significant rebound in the innovative drug industry. After the September profit-taking, it is likely to regain momentum and usher in a new round of opportunities.
Other sectors, such as commercial aerospace and solid-state batteries, are also showing signs of life. I proposed the concept of six major tech sectors early last year, and this view is now being gradually validated. These six sectors—the primary beneficiaries of the AI era—are expected to release earnings and enter their main upward cycles over the coming years. Chips and computing power have already experienced their main rallies, lasting over a year, and after this correction, they likely still offer opportunities for positioning. Humanoid robots, commercial aerospace, solid-state batteries, and biomedicine are the key sectors expected to release earnings and enter their main upward phases in the next few years.
The strategy of holding one part tech and one part dividend-paying stocks is prudent. Many investors prefer to go all-in on a single tech sector, which carries significant risk. While such bets can rise quickly, they severely test one's composure during downturns, often leading to substantial drawdowns. The dividend portion provides defense and stability for the portfolio. Holding some lower-risk dividend stocks can act as an anchor, and when tech stocks plummet, they can offer a degree of hedging, as dividend stocks often rise when tech falls. A sound investment strategy ensures you are never investing blindly, but rather with purpose. Every buy, sell, or position adjustment should be based on logic and reasoning, not on chasing momentum or frequent trading.
I have long advocated for Buffett's value investing principles, and have also proposed a Chinese-style value investing theory tailored for the A-share market. A topic of recent interest has been the management transition at Berkshire Hathaway. Berkshire has announced that Warren Buffett will transition to the role of Chairman Emeritus and remain a director, with Howard Buffett becoming Chairman and Greg Abel taking over as CEO to manage operations. This arrangement of separating ownership and management is worth noting. Buffett has consistently adhered to value and contrarian investing. He remains cautious when US stocks are climbing steadily, and better allocation opportunities arise only when the market experiences significant declines. There is considerable debate about when US stocks will peak. We do not attempt to predict the top or bottom, but we can stay observant. Since this AI tech revolution is led by US stock leaders, we should first check overnight how US markets performed upon waking. If there is no major drop in US stocks, the A-share market's prospects are promising. However, if the Nasdaq suddenly crashes, it would be prudent to significantly reduce positions to hedge. Maintaining close observation is a sensible strategy at this time.
US stocks have been in a bull market for over a decade, and valuations are certainly rich. When evaluating tech leaders, one must not only consider P/E ratios but also their total market capitalization. Some of the "Magnificent Seven" have become so large that they pose inherent risks. While investors should explore the opportunities presented by AI's rapid development, they must also be vigilant against the risk of a bubble bursting. This approach will help investors navigate this tech bull market steadily, capturing opportunities while minimizing potential losses when the bubble eventually deflates. Adhering to Chinese-style value investing is a crucial method for achieving long-term investment success.
The MACD golden cross signal is forming; these stocks are on the rise! This content is for reference only and does not constitute investment advice. Investors should act at their own risk.