Newsletter commentary Jan 2022

The trading in Jan 2022 differed from the market’s expectations at the end of last year. The opportunities expected widely by the market did not appear. The style of the market has been so far trading on “low price” rather than continuing looking at the potential for a “bright future”. The US market has been trading on inflation with the market itself largely divided.  Many stocks have fallen sharply after the retail investors’ activities. The main technology companies performed differently in the recent results, followed by Facebook falling by a quarter after results while Apple and Google basically recovering this year’s decline.  

Behind the performances, the market has been expecting major background changes. The domestic market has shown hesitation on the valuation of good tracks after the extreme structural differentiation in the past few years. After several years of investor education, there has been little disagreement about the long-term development of these industries, and many may have been over optimistic. However, constrains have been overlooked such as the matching of the absorption capacity of new energy, the pressure on the cost of new energy vehicles after the penetration rate rapidly exceeded 20%, the squeeze on traditional fuel vehicles, and the involution started to show in the competition. The other end of the extreme differentiation is the very low static valuation of traditional industries. With no stories to tell, little money keeps flowing in. However, the new focus on maintaining economic growth has changed the market expectation on the "duration" of these companies. Meanwhile at the individual level, some of the companies reduced capital expenditures, and their ability and willingness to increase shareholder returns through buybacks and dividends have improved.

The focus of the overseas markets has been inflation. Inflation is complicated. No one fully understood why inflation continued to be so low 20 years ago, but people got used to it later with negative interest rates. That’s why it was attributed to temporary in the first place when there was a sharp inflation, but it’s now not necessarily the case. The division of labor and cooperation around the world have now encountered the impact of increased supply chain security requirements and of the epidemic. The long-term goals of carbon peaking and carbon neutrality have increased energy prices as well as instability. The purchasing power boosted by one-off cash payments during the pandemic will gradually fade. At the same time, the labor participation rate is showing signs of recovering, and the long-term threat is unclear. Low inflation and abundant liquidity have for a long time benefited the valuation in the stock market, as well as the profitability of many companies. If inflation is no longer persistently low, it is a major variant that needs to be considered. In January, stock markets all over the world had the worst start in many years, while commodities had the best. This is a phenomenon that we need to pay attention to.

The domestic market's expectation of maintaining economic growth is not low in the early stage. Under multiple policy goals, the toolbox for maintaining growth will be subject to many restrictions. For example, increasing loans was a traditional and effective way in the past, but now is not willingly used. The threshold of loan has also been raised by the capital requirements and the improvement of risk control abilities of financial institutions in the past few years. The more important change is the slump in real estate, which has reduced loan demands. The new toolbox under high-quality development is mainly based on the initiative of market players. It will take some time for the targeted growth to be achieved under the current demand weakening, supply shortage and lowered expectations, but we believe things will turn around eventually.

Despite the lack of liquidity last year, the stock market still had positive returns after rising for two consecutive years. The lagging effect of the money-making in the previous two years had attracted a large amount of capital to continue flowing in. But this effect has been ending in the end of last year. The investors’ enthusiasm to buy products waned due to the lack of profit-making from investing in stocks last year. This year's loosening of macro liquidity is expected to bring about a gradual improvement in economy. However it takes time to boost the stock market and attract capital inflows. Considered that the myth of buying houses as the most important way of saving has faded, capital flows to financial products should be the general trend.

Over a long period of time, the market's effectiveness on daily and monthly levels has greatly improved, which has masked the inefficiencies in longer dimensions such as years. We used to focus on marginal changes with magnifying classes. But magnifying glasses are hardly substitute for telescopes, through which a lot of what you see in details are really just noises. The changes in supply and demand, the competition patterns, the barriers and valuations that everyone was talking about in the past are overshadowed by the long-term demand. This will be a risk, although we don't know when it will happen.

Our portfolio at the end of last year highlighted reasonable valuations and a visible long-term outlook. We suffered from a drawback, but after re-assessment, we believe that the portfolio is still solid. Some companies are gradually showing progress and their attractiveness is increasing.