Newsletter commentary Nov 2024

In November, the market saw significant fluctuations at high levels, with a total transaction volume of RMB 41 trillion and a turnover rate of 50%. These atypical trading characteristics likely contributed to the market trends having little correlation with our portfolio, resulting in negative performance.

Following the policy catalysts in September and October, the market has gradually shifted into a phase of observation and validation. The U.S. elections in November, along with the formation of Trump's cabinet and his policy directions, have also influenced market dynamics. The market is now evaluating the balance between the pace and intensity of domestic policies and the potential impacts of changes in the external environment for the coming year.

With the upcoming Politburo meeting and the Central Economic Work Conference at the end of the year, we can expect clearer direction, greater intensity, and more detailed domestic policies. Our baseline assumption is that an increase in the deficit, special bonds, and special treasury bonds will lead to an expenditure boost equivalent to about 2% of GDP. Given the slow pace of expenditures in 2023-2024, the actual impact in 2025 is likely to be more significant than the projected 2%. Additionally, there may be some quasi-fiscal institutions operating within the policy framework. Previously, this primarily involved institutions like the China Development Bank, but now new entities have emerged as well.

Overall, we are optimistic about the increase in spending. We also expect a significant improvement in the pace of expenditures. While the spending direction may not fully align with market expectations, a substantial amount will still be geared towards consumption. If these expenditures can set long-term expectations, such as confirming that the trade-in program will extend beyond a single year, it would help stabilize the behaviour of consumers, manufacturers, and investors, resulting in better outcomes. 

Next year, there might be some reductions we haven't accounted for. In 2024, the main factors were the decrease in land sale revenues and the spending pace of special bonds. We anticipate significant improvements in these areas in 2025.

Given Trump's cabinet formation, it's time to abandon any positive hope. The situation has reverted to a state where agreements and rules have limited effectiveness. We can only make predictions based on the interests and constraints of the other parties. The market currently views Trump as omnipotent, believing that policies like tax cuts, deregulation, increased tariffs, tightened immigration, and a strong dollar will revive U.S. manufacturing. Meanwhile, other countries seem to have limited bargaining power.

We see many contradictions in this scenario. For example, if the U.S. doesn't have a trade deficit, there will be fewer channels for dollars to flow to other countries, potentially undermining the dollar's status. Even more challenging, these policies almost invariably lead to inflation, which could be a direct reason for Biden's potential departure from office. 

During Biden's four years, GDP grew by about 13%, with nominal GDP increasing by roughly 33%. The S&P 500 surged by 60%, adding nearly (0 trillion in market value, possibly marking the largest absolute increase in U.S. history. From a market capitalization perspective, there may never have been so many great companies exceeding a trillion dollars in value, yet he was still abandoned due to the wealth gap caused by inflation. These economic achievements have little relevance to average Americans.

Trump's policies could very likely trap him in an inflation cycle. He believes that outsiders can lead experts, which might bring efficiency meanwhile but could also result in chaos. Moreover, the total size of the U.S. economy is not as significant as it used to be, giving other countries more bargaining power overall.

The scale of China's economy dictates the dominant role of our domestic policies. Although net exports have risen in recent years, their structure and direction have been optimized, becoming more diversified and boosting trade with friendly nations. Additionally, our high savings rate offers substantial policy flexibility. As policies begin to shift, there's no need for excessive pessimism—some volatility is inevitable.

Our portfolio now has greater flexibility for adjustments than before. We also aim to increase investments that are less competitive and more consumer focused.