Newsletter commentary Apr 2023

The market was tough in April. There were hot topics, but not incremental capital. The performance of our portfolios was not good. The hot AGI-related investments were uncertain to us. The overseas Chinese assets were affected by the declined risk appetite towards Chinese assets. The manufacturing companies were hit by excess supply in general.

The economic recovery in the first quarter was better than expected. The recovery of real estate could be well explained as part of the suppressed demand was released. The sales of automobiles were weak in the first quarter due to a) the panic buying in the end of last year before the expiration of the preferential policies and b) the wait-and-see caused by the sharp price cuts offered by the auto companies. The sales of new energy vehicles maintained a decent growth and the overall car sales should improve in the future. The export data of March greatly exceeded expectations with both healthy regional structure and product structure. We observed that China's economy as a whole has grown a lot in the past three years, while the structure has greatly changed. For example, many sectors in service have not recovered to the level of 2019. These sectors provide a large number of jobs that have a great impact on the personal income. In terms of manufacturing industry, the production capacity has expanded a lot, judging from the growth of loans in the industry in the past few years.  China’s supply chain was superior to that of the world most of the time during the epidemic, and the expanded production capacity has turned into supply. Export has been sound in the past three years and is expected to maintain the share and ensure stability. Basic consumption was hardly impacted, but confidence in irregular spending has been weakened.

It feels difficult to make a profit in the market because there is too much supply that the demand is hard to keep up with, even if the demand has improved. Consumption recovered, but not the revenue. From the statistics of the May Day holidays, compared with that of 2019, the passenger flow increased by 19% but the tourism revenue grew by 1%, indicating that the service industry is expected to further recover, which will lift the income expectations.

In addition, the economic cycles of different countries are not synchronized. The recovery of demand in China is not enough to offset the worrisome slowdown of other economies. The previous strong economic performance of the US is likely only to delay the slowdown after the interest rate hikes. A certain degree of slowdown is inevitably, which increases the difficulty of investment. Under the demand stimulus in some industries in the past few years, the supply has increased rapidly, exceeding the increase in demand. Overlapping the downturn of industry cycles, the profitability has been greatly impacted. Certain of the semiconductor design companies were examples.

Chinese assets have been more attractive to overseas funds with the economic recovery, but the continuous inflow of funds has been affected by uncertainties in geopolitical factors. It is not easy to attract steady inflow from outside at the moment. Some of the domestic funds that pursue long-term stable returns should have flown into high-dividend companies. This is understandable, because with the lack of real estate-related high-yield non-standard assets, stable high-dividend companies are an alternative. There are still many uncertainties in the launching of AGI-related products. Winners and patterns are far from clear compared to possible losers. The expectations implied in the stock prices of the companies are already not low.

The economy recovered strongly QoQ in the first quarter, and it might be flatter on the same basis in the future. From the observation on May Day holidays, the possible surprise may come from the service sector. The most difficult year during the 3-year epidemic was last year. From the perspective of GDP growth, the first quarter of 2020 was -6.9% as some areas in China were severely affected by Covid. This was followed by a strong rebound. The GDP growth was 0.4%, 3.9% and 2.9%, respectively in the second to fourth quarter of last year. The market has been cautious due to the long-time lower growth rate than the potential rate, but even a slow recovery this year could help restore confidence.

The economic growth in the first quarter has laid a concrete foundation for the whole year. The downside risk has been eased by the real estate and export performance that everyone was worried about at the beginning of the year. But the highly expected consumption sector didn’t exceed the expectation either, implying a low upper limit. Looking forward, export may continue to be strong to strengthen the confidence in competitiveness. The ongoing recovery of irregular and relatively large consumption expenditures might be a driving force of economic growth. Year to date, it has been difficult to make money in all walks of life. Scarce capital increase has been the tone of current investment. We are aware of the competition in some industries, and we need to identify winners when investing in such areas. Low risks and stable returns are favoured when selecting asset classes. Opportunities may be found in cyclical assets with limited supply. Although the long-term prospects are worth expecting, we must prepare for the short-term difficulties, especially from the interference of non-economic factors.