1. The style shift of "High Cut Low" is unfolding, but with different risk and reward dynamics. This week's market performance has shown that cyclical and value stocks are temporarily unable to drive the overall index higher, continuing the consolidation phase seen since early September. As we approach the end of the year, the key catalysts for cyclical stocks have yet to materialize, and the concentrated trend in tech growth sectors remains unchanged. The effective breakthrough in A-shares ultimately relies on technology leadership. In terms of cost-effectiveness, the overall profit-making effect in A-shares has declined to medium-low levels, and the adjustment phase seems to be nearing its end. Meanwhile, the relative expansion indicator of the ChiNext index compared to the CSI 300 has also fallen to a low level, indicating that the "High Cut Low" trend is no longer attractive in the short term. Discussions on style shifts for the fourth quarter are clearly increasing. Although the short-term "High Cut Low" style shift is indeed unfolding, we caution that there are different risk and reward profiles; this week's "High Cut Low" trend has defensive characteristics, with increased internal competition in cyclical and value sections focusing on aggressive assets (such as metals and chemicals) while defensive assets yield absolute returns. The market behavior this week clearly indicates that the "High Cut Low" trend cannot sustain a higher overall index, and the overall profit-making effect is declining. The rebound in technology and the "High Cut Low" trend within tech are more rewarding. This market characteristic can be mainly attributed to the yet-to-come key catalytic timing for cyclical stocks, with the technology growth sector showing continued promising catalytic trends. For cyclical stocks, improvement on the demand side requires waiting for confirmation of the "policy bottom," with key breakthrough periods likely occurring only after the spring of 2026. The natural elimination on the supply side is expected around mid-2026, with the effects of anti-involution policies likely becoming evident after then. Currently, cyclical sectors lack offensive logic. However, we highlight three positive mid-term factors for tech growth: 1. Overseas AI capital expenditures are still on an upward trend. 2. The domestic AI sector is also making steady progress. 3. 2025 will mark an upward turning point in the linkage between primary and secondary markets, with more emerging industry highlights entering the capital market’s view over time. Therefore, as we near the end of the year, the effective breakthrough in A-shares ultimately relies on technology leadership. We emphasize that both the overall market and technology growth adjustments did not begin in October but have extended from early September until now. From a short-term cost-effectiveness perspective, the overall profit-making effect in A-shares has dropped to medium-low levels, suggesting that the adjustment phase is approaching its end. Simultaneously, the ChiNext's relative expansion indicator compared to the CSI 300 has reverted to low levels, indicating that "High Cut Low" is indeed a low-cost trade.

2. The international environment has eased. The credit risk among regional banks in the U.S. has manifested, disrupting short-term risk appetite. Currently, risks seem limited to isolated events, as indicated by a decline in the VIX index observed this past Friday. Trump's statements have softened, and the TACO trade has been thoroughly validated. External disruptions have largely been the main contributor to the downward shift in risk appetite. This week, issues concerning loan fraud and bad debts involving regional banks in the U.S. have raised investors' concerns over broader credit risks. The upward spike in the VIX index this week, combined with a sharp drop in the U.S. regional bank index, has struck a blow to the overall market, driving down global risk appetite. This has illustrated typical characteristics of risk appetite shocks. Presently, these risks are considered isolated incidents, with the VIX index retreating after reaching a peak this past Friday. Additionally, Trump's recent comments toward China have softened, which, along with the validation of TACO transactions, could help lift risk appetite. The worst phase of external pressures might now be behind us.

3. The mid-term market assessment remains unchanged: before the spring of 2026, the catalytic impact from technology industries will significantly outweigh that from cyclical sectors. Currently, the long-term cost-effectiveness of technology appears relatively low, but short-term issues regarding cost-effectiveness have been thoroughly digested. By accumulating industrial catalysts, a new round of tech trends can unfold. The spring of 2026 might represent a cyclical peak (a high point in a structural rally), at which time the A-share market could face challenges from three issues: 1. The arrival of a critical verification period on the demand side; as supply growth slows down, the supply-demand imbalance may improve. However, if demand remains weak, it might delay the reversal of supply-demand dynamics and push back the emergence of the new phase in the market. We note that supply-demand improvement in 2026 will not be "disproven" but merely "delayed." The global easing scenario in 2026 will strengthen further, thereby bringing the efficacy of "policy bottoms, market bottoms, and economic bottoms" back into focus. The timing of reinforced domestic easing could signal the start of a new market trend. 2. At that time, new structural highlights may still require waiting, as technology industry catalytic trends and verification of anti-involution effects will need time; hence, the spring of 2026 might still lack new leading themes. 3. Long-term cost-effectiveness for tech industry trends may reach extremely low levels (akin to the ChiNext at the end of 2013 and the food and beverage sector at the end of 2019), potentially placing the market into a mid-term consolidation phase. Following a short-term adjustment, we anticipate that Q4 of 2025 will still exhibit tech-led market movements. The spring of 2026 may mark a cyclical peak; however, it is unlikely to represent the peak for the entirety of 2026 or the current comprehensive bull market. There will still be depth in the bull market, and as time passes, the conditions for a full bull market will be increasingly favorable.

4. Currently, cyclical products with offensive logic (such as metals and chemicals) are not performing well; instead, assets leaning towards defensive and hedging characteristics (like banking and food and beverages) are dominant. We continue to point out that the outlook for 2026 is more promising than for 2025 in terms of growth trajectories, with opportunities remaining in Q4 of 2025. Key areas to watch include: ongoing upward beta in overseas computing power, advanced manufacturing represented by new energy, and defense and military industries. The recent adjustment in the Hong Kong stock market has been more pronounced than in the A-share market, and rebounds in the Hang Seng Technology Index represent high-risk avenues. In the short term, there are clear differences in risk profiles; the "High Cut Low" trend continues, yet competition among cyclical assets with offensive logic (such as metals and chemicals) is also intensifying, but profit-making effects remain poor. Meanwhile, assets focused on defensive and hedging attributes have a clear advantage (banking, food, and beverages). We believe that the adjustment phase may be nearing its end, prompting a gradual shift towards offensive directions. We reiterate that the growth outlook for 2026 is brighter than for 2025, with ongoing opportunities in Q4 of 2025 to highlight: the upward trend in overseas computing power beta, advanced manufacturing led by new energy, and defense logistics. Given the current adjustments, the market's mid-term structural outlook remains unchanged; the anti-involution theme is crucial for transitioning from mid-term structural bull to a comprehensive bull market. We emphasize the importance of focusing on sectors with high global market share in photovoltaic and chemical industries during phases of anti-involution, aiming for coordination in pricing power through mergers and debt consolidation to enhance industry concentration.

Risk Warning: Overseas economic downturn exceeds expectations, and domestic economic recovery fails to meet forecasts.