Newsletter commentary Oct 2024

In October, the market experienced a surge followed by a pullback, driven by heightened excitement. Trading volumes remained steady, averaging around 2 trillion yuan.

The recent market mobilization exceeded expectations. In 2015, it took nearly four months for trading volumes to rise from 500 billion yuan to 2 trillion yuan. Back then, there was significantly more leveraged trading compared to now. This time, the market completed the mobilization in just one or two weeks.

In our view, first and foremost, the value emerging after a prolonged decline is becoming evident, awaiting a catalyst to unlock its potential. Technically, this could lead to a short squeeze on positions built up over the past two years. Secondly, the way information spreads is significantly different compared to 2015, amplifying many aspects.

We believe this presents an opportunity to revive the narrative around investing in China. In 2019 to 2020, many investment narratives were influenced by American themes. The boundless expansion of the free market led to extremely generous valuations from investors. The validation of numerous industry narratives at that time led to an overwhelming surge in investor confidence. Later, it became clear that this wasn’t entirely the case.

The three years of the pandemic, combined with the peak in the real estate market, have led to sluggish economic growth after the reopening in 2023. Price pressures are particularly severe. The continuous decline in real estate and stock prices, coupled with some non-economic factors, has dampened enthusiasm and animal spirits.

The market has begun adopting a Japanese-style narrative, which is self-reinforcing but not entirely accurate. Over the past 20 years, Japan has seen few new leading industries or well-known companies emerge. In contrast, China has seen many remarkable companies rise to prominence in various sectors over the past five to ten years. However, these achievements are overshadowed by the persistent decline in stock and real estate prices, which has popularized the Japanese-style narrative.

The recent market surge has prompted a reassessment. We do not believe that the rise in all stocks is justified. However, it has objectively served to make everyone reassess the situation. China remains the world’s second-largest economy, maintaining a growth rate of 4-5% and contributing significantly to global economic growth. Numerous industry upgrades continue to emerge.

The market capitalization of China’s stock market is relatively small compared to the country’s household savings. Despite this, China remains the world’s second-largest stock market, making it an indispensable option for many investors. Recently, the culture of shareholder returns in China’s stock market has improved significantly. After years of decline, the rationality of housing and stock prices has also improved, with value now emerging relative to government bond yields.

We look forward to the gradual unfolding of a new narrative for investing in China. This new narrative will not develop overnight and will require significant effort and favourable conditions.

In recent years, the capabilities and enthusiasm of several key sectors in China’s economy have been affected. Post-pandemic, local governments are facing financial constraints, making it challenging to find new growth drivers in the post-real estate era. Additionally, household income expectations are not optimistic. Major asset prices have been sluggish, and many industries in the corporate sector are experiencing overcapacity. External forces are now needed to improve their balance sheets or enhance their expectations.

The United States may be relying on the credit of the dollar to create demand, with the government as the debtor, thereby postponing debt issues. Conversely, China can leverage its high savings rate to stimulate demand. The central government can view increased spending as transfer payments, reflecting its policy intentions, such as promoting common prosperity and industrial upgrades. This approach can also maintain the country’s sovereign credit rating. These expenditures have a strong potential to increase output and promote harmony, making this region still a land of opportunity for investment and living.

The unfolding of the new narrative relies on policy support. While the pace is important, it is not the only crucial factor. Presenting a new policy framework and objectives is essential. Although we cannot yet say that a new policy framework has fully taken shape, we sense a different atmosphere this time. Therefore, we remain cautiously optimistic and look forward to positive developments.

In terms of investment direction, some policy changes will create new hotspots. However, we should strive to return to the fundamental elements of investing: good businesses, strong governance structures, and reasonable prices.