Newsletter commentary Oct 2025

Is the Market Ahead of Itself or Simply Prescient? In truth, we don’t know much

October saw an overall upward trend in the Shanghai Composite Index, while the All-Share Index and the CSI 300 remained largely flat. The STAR Market experienced significant declines, with the Hang Seng Index dropping by 3.5% and U.S.-listed Chinese stocks falling by 4–5%. Market volatility increased, and structural shifts emerged: dividend-focused companies fared relatively well this month, while previously strong performers, such as those in the computing sector, saw sharp fluctuations.

This year has been marked by extreme market divergence. The performance gap between the best- and worst-performing sectors in the Shenwan primary industry classification reached 80%. A similar trend is observed in the U.S. market, where NVIDIA reached a new milestone with a ＄5 trillion market capitalization, while many other companies delivered only modest results. Since the pandemic, the K-shaped divergence under the AI wave has become particularly pronounced. This phenomenon is not new, but it is evolving into a tangible challenge. For instance, the Federal Reserve Chair recently indicated that a December interest rate cut is not a foregone conclusion, as lowering rates may do little to alleviate current employment issues, though it could benefit capital markets. However, given that the top 10% of earners in the U.S. account for 50% of consumption, rate cuts would likely favor this group far more than those struggling with employment, potentially exacerbating existing disparities. This represents a broader, systemic contradiction.

Third-quarter earnings reports suggest that stock price divergences largely reflect underlying fundamentals. Both China and the U.S. are nurturing new economic sectors alongside traditional ones, with certain industries in other countries also benefiting. However, most nations have seen little structural change, yet their equity markets have performed strongly this year, supported by expansive fiscal and monetary policies globally. Going forward, marginal shifts in these policies warrant close attention.

AI investment commitments continue to drive market sentiment, but corresponding revenues, while not negligible, remain relatively limited. For example, OpenAI reported a quarterly loss of nearly 12 billion, a sharp increase from the first half of the year. Its annualized revenue by year-end is projected to be around 15 billion. Yet, it serves as the foundation for several trillion-dollar market valuations. So far, besides OpenAI, there are few native AI applications generating substantial revenue. While OpenAI has launched numerous tools, few have sustained significant traction. Unlike the internet or mobile internet waves, which spawned entirely new products and services, the current AI boom primarily enhances the efficiency of existing offerings, without yet producing groundbreaking novels, films, or pharmaceuticals. Optimists continue to wait, believing more time is needed.

If truly innovative applications fail to emerge, the focus will shift to restructuring existing businesses. People will still have the same amount of time for shopping, entertainment, and work, albeit with slightly improved productivity. Recent earnings reports suggest that some companies are no longer benefiting merely from announcing increased AI capital expenditures, showing signs of market overcrowding. There is an urgent need for new applications and revenue streams to validate current expectations. Without the AI industry’s growth in recent years, the global landscape would appear far bleaker. Commercially, efficiency optimization by incumbent players remains the dominant theme, which may represent a conservative yet viable investment approach. We refrain from making definitive judgments and will continue to monitor developments.

The structure of global power investment is poised for significant transformation, driven by changes in power generation methods, electricity density, and usage patterns. The rising share of renewable energy and evolving consumer demands will place greater emphasis on grid stability. Investment priorities will shift markedly, from power generation and transmission to energy storage, requiring substantial new capital.

The 15th Five-Year Plan’s focus on economic development and managing our own affairs well underscores China’s resilience and confidence. In a complex environment, true capability becomes evident. Developments since April, culminating in the recent APEC meeting, demonstrate that many prior concerns were overstated. China has proven its ability to create and safeguard a favorable development environment.

Strategic advantages do not preclude short-term challenges. The transition from old to new economic drivers remains arduous. Markets expect continued fiscal expansion in major overseas economies next year. China’s policy direction will be further clarified at the upcoming year-end economic conference, with self-reliance and long-term planning remaining foundational principles.