Newsletter commentary Sep 2020

The market consolidated in September. Still since the beginning of this year, the A-share market has risen a lot. Had we known that there would be an unprecedented epidemic this year on December 31, 2019, which would significantly impact in the global economy; at the same time, China and the United States would have strains in their relationship; and there would be many strange things happening in the US election season, would we hold any stocks? In fact, Both Chinese and U.S. stocks markets have performed very well. Such good performance was on the basis of an already good year last year. 

Why is this? Arguably the rise and fall of stocks is caused by a very complicated system. In the long run, it mainly depends on whether these companies can continue to create value at a quick pace, and also on the relative attractiveness of stocks relative to other assets. Absolute value is also built on a relative basis.

The volatility in September is mainly due to the fact that many stocks have risen a lot under difficult circumstances this year. The macro backdrop supporting the rise is the economic recovery post the epidemic, and the efforts of central banks to inject liquidity. Now that the economic shock is gradually easing, and the market is beginning to worry that the stimulus policy is going to neutralize. In fact, the Chinese government has already begun to take actions after May, and its attitude has become clearer since July.  Meanwhile, situation in the US has also changed. The FED has had similar hints and actions.  As the recovery of the Chinese economy continues, the rate of recovery has begun to normalize. Moreover, market is also concerned about the recurrence of the epidemic overseas, although the mortality rate is still low, as it increases uncertainty and disrupts the market. Regarding all above factors, our judgment is that such normalization of economic policies is expected. Based on the current economic conditions, this process will be very long and the impact will be relatively moderate. The second wave of the epidemic is also expected. Based on the current risk control systems, it will have a much smaller impact on the economy. Therefore, the economy will still be in the recovery process, although the degree of recovery will vary among different countries. 

Compared with some short-term opinions, we prefer to discuss with you our views on some long-term market trends, which were also laid out in detail in our last commentary and a recent article on our WeChat public account. We believe that buying stocks and buying China are likely two major trends in the history of investment. They are unprecedented, and the logic is very clear. Firstly, value is a relative concept. If the interest rate level is unprecedentedly low and will continue its downward trend, will the 60:40 rule of asset allocation change? And will the status of stocks rise? With the efforts of more market-oriented and more open, can Chinese assets obtain a share corresponding to its share of the global economy? Will foreign investors invest in China's financial assets in the same way as they did in building factories in China in the 1980s? Facing declining investment opportunities in real estate and various rigid repayment trust products, will China's wealthy individuals actively and passively take stocks as their main asset allocation, especially when the stability of China's stocks improves?

In our opinion, the answers to above questions are all yes. It used to be a question of when, but now it seems to be quickly becoming realities.

Regarding the capital market, we think the newly implemented registration system is similar to China’s transition from a planned economy to a market economy, in terms of the significance. The energy emanating from it is amazing, and it can help realize the transformation of China's demographic dividend from quantity to quality. Compared with the past, more companies will be able to create value faster. These are the underlying logics for long-term investment in Chinese assets. For us, the challenge of investment is to buy good people and good business at the right price. If it is a linear growth world, the right price is easier to judge. Now that there are many non-linear growth, the proportion of the total value created by good people and good business will be even greater.