Newsletter commentary July 2022

In July, A-shares and Hong Kong stocks fell notably. The US stocks rose significantly, whereas overseas listed China tech stocks fell sharply. We maintained a high position and the decline in ADRs exceeded our expectations. 

A few things triggered the major corrections: the slow recovery of A-shares in trading and the continuous sporadic interference of the epidemic, as well as real estate risks caused A-shares to drop; the Hong Kong market trading with the global liquidity and the weak Hong Kong dollar due to a non-home market affected Hong Kong stocks; the oversea China tech stocks, especially ADRs, were plagued by the audit oversight issues and international relations. Meanwhile, the US were seeing a periodic rise of stocks, bonds and commodities thanks to a lower inflation expectation and a resilient economy.

We believe that China’s economy is recovering. Although there are disruptions from epidemic which needs to be continually observed, people are no longer nervous about the current variants, which is helpful for the resumption of consumption, especially service consumption. Short-term savings have increased, because the public has been cautious about the prospect of income growth. If the epidemic disturbance weakens the short-term consumption rate will rise, and the savings rate will decline, which should help the recovery of consumption.

Policy wise- the current stimulus mode of China's economy determines that the recovery is slow. The improvement in consumption and employment that everyone can easily perceive are lagging. Just like the year of 2020, after some trends in economic recovery, the weakening of the stimulus policy is also expected. We still think that the China's economy is slowly recovering rather than not recovery at all. In terms of real estate risks, since the strengthening of supervision from the second half of last year, the protection of property buyers to ensure they receive their flats on time, should have been better. Somewhat unexpectedly, market transactions such as the prices of commodities seem to have only recently begun to reflect the real estate risks that have been brewing for more than a year. Based on experiences, the guarantee of property delivery becoming a major focus will lead to a better efficiency of solving the real estate issues, hence will not be an introduction to systemic risk. But the continuing impact of the inflection point of the long real estate cycle will continue to be reflected. The short-term property sales are the key. Real estate investment is weak, but the sector may be in a better shape after the properties are delivered. We are more optimistic about short-term property sales than consensus, but think the medium- and long-term pressure still needs to be eased; 

Outside of China, U.S inflation is not out of control, nor is controlled. The U.S economy is not bad. The market is no longer willing to fall recently, looking for any good news to go long, but the test does not seem to be over. The overseas inflation is in a situation of a nearly to the vertical supply curve, encountering an overextended demand, inevitably resulting in, some degree of correction of demand, but it is still possible that the correction will not be too dramatic. 

 Overall, our view on China’s real estate is not so pessimistic in the short term. Since the second half of last year, real estate has benefited from the epidemic at the policy level, with mortgage interest rates dropped sharply,  and purchase restrictions loosened largely. The contradictions in the medium and long-term from the demographic structure to the restructuring of the industry business model and structure still exist. It may be difficult for us to make a profit from this sector, but systemic risks can be ruled out now.

In fact, the weakness of the Hong Kong market and the significant pressure on Chinese stocks have a plenty to do with the investor structure and the flow of funds. The market seems to be too pessimistic in view of companies’ business operations. But market sentiments may be disturbing for a long time, which we need to pay attention to. 

In reality, for the trading of A-shares, the current difficulty is that the market trend is far ahead of the fundamentals, such as consumption, in fact, we think it is not so pessimistic, but many stock prices have been the same as there is no epidemic, or some industries have only lately begun to reflect in the impact of some epidemics, but the stock price has rebounded sharply; some recognized boom industries, its performance is even more extreme; What is now determined is that the advantages of manufacturing are so obvious, and innovation in many area is not limited to catching up, we work continuously to discover more opportunities from those sectors.