Newsletter commentary Jan 2021

The market had a hot beginning in January, and then showed signs that this year is a year full of uncertainties.

One is that whether low interest rates, the biggest driving force for market in the past few years, would have upward pressure in the short term. The probability that it will be tested this year is rising rapidly. With the fiscal stimulation of subsidies from overseas economies, the balance sheets of companies and households have been solid. Once the epidemic is under control, the economic recovery of major overseas economies may be rapid, which will challenge the current assumption that the Fed’s interest rate hike is far away. In the past few quarters, the PBOC has repeatedly reminded that a certain degree of tightening should be expected.

We can expect interest rates to stay in the lower region for a long time, but some correction of the deviation caused by the epidemic in the short term can also be expected.

Secondly, the high valuations of companies in many industries will face the test of interest rate changes, sustainability of growth and diversification of investment opportunities when economy recovers this year.

The third is that the recent retail investor herd behavior  in the US market is a copy of the traditional occupation of Wall Street, using Wall Street rules to challenge Wall Street. Behind it is the gap between the rich and the poor. The contradiction between the relative gains of the property owners brought about by loose monetary policy calls for more direct fiscal policy. The impact of the policy on long-term interest rates and exchange rates is worth paying attention to. However, in the investment experiment, retail investors will soon encounter the test of the quality of those companies. It will be difficult to break the methodology of discounted cash flow. Only some unclear assets like Bitcoin have continuous magic. The long-term uneven development of overseas economy, coupled with the epidemic everyone stays at home for a long time, will bring many possibilities after the epidemic in the future. These are all uncertainties to the market.

Fourth, the institutional “grouping” behavior in the Chinese market on the one hand has allowed institutional investors to obtain excess returns and promoted the institutionalization of the market. This is an inevitable process for the gradual decrease in the proportion of retail investors. On the other hand, this process will not happen overnight, and grouping itself is not going to change. After all, good companies are scarce. There are very few companies with long-term excess returns, although there will be changes in some specific company names.

Finally, returning to the nature of investment, there are a number of companies that can continue to create excess returns. After our economy turns to high-quality development phase, the environment for outstanding companies has become more friendly, more market-oriented. Registration system and Internet digitization are two important block points to the Chinese economy. If they are cleared up, the resulting efficiency gain will be amazing. 

So definitely there will be more market fluctuation, but it is a minor issue. There will be continuous product innovation from excellent Internet companies that will serve more people and more scenarios. There will be excellent financial service companies that seize the big opportunity of wealth management. There will be leading manufacturing companies that upgrade themselves, expand globally, and increase market share. So on so forth with consumer goods, medical and education companies. We are very excited to witness those innovations and changes going forward.