Newsletter commentary July 2024

The market indices all performed averagely in July, and our portfolio did not perform well.

According to various high-frequency data indicates that the current economic challenges are still quite significant. There is a lack of effective demand, and consumer momentum weakened in the second quarter. There is also significant price pressure on various products. Additionally, the transition between old and new growth drivers is experiencing some growing pains. Overall, previous fiscal stimulus efforts were not substantial, local governments are deleveraging, and some industries have reduced investments due to supply-demand imbalances.

The recent Political Bureau meeting thoroughly discussed the current problems. While maintaining strategic focus and firm development confidence, the meeting emphasized this year's work targets and called for more impactful policies. 

With some new policies have recently been introduced, such as the trade-in subsidy program and interest rate cuts. Given the lack of effective demand and ample policy space, the policy choices are more about balancing short-term and medium-term objectives. Achieving short-term targets is necessary for connecting to medium and long-term goals. In our view, the fiscal spending is likely to increase in the second half of the year, and we also need to closely monitor the offsetting effects from the contraction of other economic entities.

Moving to the international environment, the US interest rate cut is getting closer. At the same time, as the uncertainty of overseas demand increases, international capital flows may undergo some favorable transformations. In particular, the highest stage of the Sharpe ratio of AI-related investment may have passed, and the volatility will increase. We believe that the implicit expectations of these companies are not low now, and they need to make substantial progress in the short term.  At the same time, the sustainability of the 200 billion to 300 billion AI chip investments implied by benchmark companies needs new evidence to support it. In fact, it is still explained by the fear of missing out, but if this intensity of capital investment does not get feedback from application revenue, sustainability is questionable.

Domestic consumer goods investment generally shows that the pressure on consumer goods for all people is not small, and the changes in channels are still iterating rapidly, which is a loss to the stability of consumer goods. In addition, some seemingly necessary consumer goods in China are greatly affected by changes in current income expectations. 

Notably, the sales of many overseas luxury goods in China have declined significantly.

 In addition to the substitution of overseas purchases, the defect of many consumer goods in terms of stability decline after the expansion of consumer groups is more obvious when the economy is weak.

Only some consumer products targeting specific groups of people still maintain a good momentum.

We believe that the relevant internet platform companies are still viable substitutes for reasonably healthy consumption. Their channels are still evolving. If AI does not produce revolutionary new apps, these platform companies will continue to occupy a decent position in the ecosystem.

Meanwhile, the domestic manufacturing industry had a story of "going overseas" in the first half of the year. However, due to concerns about the overseas environment, most of them retreated. We believe this will be a story that plays out over the next 10-20 years. Many Chinese companies will find new growth curves for themselves overseas.

The increasing exposure of Chinese brands in international sporting events indicates that "Made in China" is transitioning towards "Chinese Brands". Many domestic industries have experienced some degree of overcapacity. While this has promoted industrial progress in some areas, it has also resulted in significant wealth destruction in many cases.

The cost-effectiveness of high dividend-related investments has declined. Stability and growth are usually not achieved at the same time. Many high dividend stocks focus on stability, and the stability of many domestic industries has not yet been tested. In the case of average growth, a rapid rise in stock prices may be a waste of money.

In the context of insufficient effective demand, many economic entities tend to be more cautious. However, extrapolating the overall economic outlook solely based on micro-level sentiments may not always be accurate.

We still believe in the overall competitiveness of the economy. We need to be patient and adapt to making investments in an environment where it is increasingly difficult to maintain monopolistic power.