Tianfeng: How to determine the style switch in the fourth quarter?

Tianfeng released a research report stating that in the context where the full-year profit effect has been largely realized, fund behavior in the fourth quarter tends to be conservative. Combined with policy expectations and performance verification window resonance, the market style often shifts to large-cap blue chips with a focus on "profit quality + valuation safety". In terms of trading behavior, the fourth quarter is also trending towards volatility convergence, with stock market liquidity tightening and monthly turnover decreasing. At the industry level, leading industries are mostly concentrated in stable and cyclical sectors, reflecting a decrease in investors' risk preference towards the end of the year and a demand to lock in annual returns. Considering the bull market trend in the overall market in the first three quarters of the year similar to this year, two logics can be observed: one is the switching logic of "lagging stocks catching up + profit-taking with high gains", and the other is the main theme. Tianfeng believes that in the fourth quarter, attention should be paid to whether the conditions for switching to undervalued sectors are ripe, and whether the prosperity of high-valuation sectors can be sustained. However, a switch in the market solely based on undervaluation may not drive a sustained trend. Tianfeng's main points are as follows: In the context where the full-year profit effect has been largely realized, fund behavior in the fourth quarter tends to be conservative, combined with policy expectations and performance verification window resonance, the market style often shifts to large-cap blue chips focusing on "profit quality + valuation safety". Overall, according to the 2005-2024 samples, micro-cap stocks have higher winning rates, but the differences between various styles are not significant, indicating that there may be characteristics of risk rebalancing in the fourth quarter. Considering the bull market trend in the overall market in the first three quarters of the year similar to this year, it can be further observed that the fourth quarter Shanghai and Shenzhen 300, and the superior performance strategy relative to the full A market have positive excess returns, reflecting that the market tends to return to fundamental certainty towards the end of the year, shifting its focus from "high elasticity" to "high stability". In terms of trading behavior, the fourth quarter also tends towards volatility convergence, with stock market liquidity tightening and monthly turnover decreasing. At the industry level, leading industries are mostly concentrated in financial, stable, and cyclical sectors, reflecting to some extent a decrease in investors' risk preference towards the end of the year and a demand to lock in annual returns. When considering the bull market trend in the overall market in the first three quarters of the year similar to this year, two logics can be observed: one is the switching logic of "lagging stocks catching up + profit-taking with high gains". Some industries with weaker excess returns in the first 2-3 quarters catch up, such as upstream resources in 2006, and consumer goods in 2007. There are also some high-gaining assets that experience a correction in the fourth quarter, such as TMT and defense sectors in 2014, and upstream resources like nonferrous metals and coal in 2017. The second logic is the stability of the main theme, such as food and beverage in 2017, and machinery and equipment, power equipment, and defense in 2020. In the fourth quarter, attention should be paid to whether the conditions for switching to undervalued sectors are ripe, and whether the prosperity of high-valuation sectors can be sustained. Currently, some cyclical sectors such as finance, consumption, etc., are still at historically low valuations, providing safety margins and switching space. However, we believe that a sustained trend cannot be solely driven by undervaluation and may require policy catalysis and improvement in economic data. Risk warning: 1) Past historical experience is for reference only; 2) Policies may have uncertainty in implementation; 3) Overseas liquidity may tighten more than expected.