Newsletter commentary Jul 2020

In July, the market initially had a rapid rise due to the strong economic recovery in the second quarter and the accumulated “wealth effect” in the previous period.  Soon, it became volatile due to changes in the external situation and domestic efforts to cool the market. We also feel that opportunities in the market have proliferated, reflecting the improvement in economic expectations and the price reactions of lagging sectors.

The economic recovery in the second quarter is better than expected. At the same time, most of the problems we are encountering are mid-to-long-term problems. We must be prepared for a mid-to-long term solutions as well. This is the keynote of recent decision-makers.  Therefore, we expect the emergency rescue phase to gradually pass. The economic policy will be more based on the long-term.

Recently, there have been new changes in the global epidemic development. Many countries have not effectively controlled it. The number of new patients worldwide continues to rise every day. This has brought great challenges to the normalization of the global economy. Luckily, the development of vaccines is progressing smoothly. There is a high probability that a vaccine will be available for use within the year.

Apparently, the global economy in the second quarter benefited from the strong financial support of various governments and the extremely loose monetary policy. In the future, the strength of these stimulus will weaken on the margin, which will also bring uncertainty to the economic recovery.

As for China’s A shares, in addition to the impact of the epidemic, the following things are worth noting. Firstly, since the beginning of this year, many bank wealth management products have mostly focused on bond allocation. In the past two months or so, the yield of 10-year treasury bonds has risen rapidly by nearly 50 BP, causing a large number of wealth management products to lose money. Unintentionally. China has completed the task of switching wealth management products to net value based, a task bank has been unable to achieve in the past many years.  Hence also a risk education. This will indirectly affect the long-term asset allocation of the public. Secondly, after the daily market turnover continuously exceeded 1.5 trillion yuan, the regulatory authorities began to constantly remind risks and took corresponding measures to cool the market. As a result of the shift in the positioning of the capital market, everyone tried to avoid big ups and downs. Thirdly, although the external environment is driven by various events, the impact on the market is still under control.

Ash you may know, the total market cap of China’s A-share is less than 80 trillion yuan, less than 80% of China’s GDP. The actual tradable part is only about half. China’s total bank deposits are about the same size as A share’s total market cap. Now Chinese are increasingly aware of investing in stocks, which is driven by the rapid decline in the competitiveness of other asset classes and the “wealth effect” of emerging bull market. Our market breadth and depth are still lacking compared with the potential funds that may enter the market, so a “Slow Bull” market might be a win-win situation for everyone, but it is really not easy to achieve. Ironically, various external shocks are a kind of buffer for achieving this. 

A few days ago, several major technology giants in the United States attended the testimony of Congress. There has been more and more attention to the monopoly power of these companies. The results announced later show that these companies are indeed very different from other companies in terms of cyclicality. They have gained somewhat a detached status. Their market cap share in the S&P 500 has also reached a new high. This is an interesting topic in this era. How to balance national competitiveness and the suppression of competition from other companies is a difficult thing.

In the future, when people think back to 2020, ordinary people may remember the epidemic; science and technology historians may remember that mankind once again defeated the epidemic with science and technology; political historians may remember the game of great powers; and economic historians should remember modern monetary theory, the far-reaching impact of which may still not be realized by everyone.

As for investment, we still focus on the long-term opportunities of Chinese assets.  We are certain that excellent Chinese companies will become more valuable. The risks are mainly known uncertainties. We believe that these uncertainties have a bottom line. A more realistic risk is that some stocks in the market are structurally expensive, although the overall market valuation is reasonable.

As a whole, we maintain a positive attitude and make some tactical adjustments in the sector allocation. “New infrastructure” and companies with pricing power are our focus.