Newsletter commentary June 2022

In June, the market rose steadily, with no obvious adjustment, completely recovering the decline caused by the epidemic. In fact, in the first half of the year, China-related stocks have had the smallest decline amongst major global markets. We continue to maintain a positive investment approach.

A few things that plagued the market in the first half of the year have undergone some new changes. First of all, following the latest version of the epidemic prevention guidelines, it is possible to have better expectations for both epidemic prevention and economic development. In the absence of significantly worse new variants, the impact of the virus will weaken rapidly. In theory, our conservative approach can prevent the worst prospects at some cost, being able to deal with various new variants, and iterate our epidemic prevention methods through our understanding of the virus, and finally a low-risk transition to a balance between epidemic prevention and economic development. After the impact of the epidemic in the past two years and half, especially in this year, we urgently need to restore the confidence of the public, lest frustration and exhaustion become habitually laying down. This makes it easier to form a consensus for economic growth now, which is the biggest positive for the economy and stock market.

Secondly as to policies, similar to year 2020, China still took comprehensive measures, mainly to save enterprises by reducing taxes and fees, expanding financial supports and increasing fiscal expenditure mainly based on inter-temporal adjustments. It also takes measures to support the purchase of properties and cars. These conservative measures won’t be as effective as a direct money transfer to the society. But the effect is sustained, with few sequelae. According to updated figures, national purchases of properties and cars have improved significantly, and government’s investment has gradually increased after the focus of work has shifted to economic development. To sum up, economic recovery is still on the right track, although comparing with the year of 2020, there is no unexpected boost from real estate and exports sectors. The broad improvement in both consumption and employment will be lagged and reflected later.

Thirdly, looking at what’s been happening outside of China, notably the Russian-Ukrainian war is facing a turnaround point by two points here. First, the sanctions are ineffective, and the sanctioning party’s benefits may be lower than the cost. Secondly, changes in the situation may help easing the pressure on the global economy. Under the current circumstances, the relationship between the U.S and China won’t change much by the U.S containment strategy, and won’t deteriorate in the short term. But in the long run, the U.S may ultimately realize that the containment is ineffective, at the same time the cost of containment exceeds the benefits.

Looking to the future, there is no doubt that the current global economic environment is unfavourable and complicated. After decades of low inflation, we have encountered persistently high inflation. The cost lies in that this round of inflation can only be alleviated by reducing demand due to limited supply. Which has been reflected in the continuous downward revision on expectations of some US listed companies recently, but the Fed's determination to anti-inflation will help everyone adjust expectations. The probability of a worst-case scenario in which rising costs drive an inflationary spiral has been lowered by this determination. In the case of economic slowdown or mild recession, the impact on China's economy and market is relatively limited, thanks to strong domestic demand and consumption, complete industrial system, and high proportion of self-sufficient coal in the energy composition of the entire economy  (in the current wet season the proportion of renewable energy such as water, wind, and light has reached 40%),  leading to a small  impact of the energy crisis. The traditional energy is controllable for China, while in the new energy sector China is far ahead. The food is basically self-sustainable, and food supply is of high importance. China’s conservative policies historically have led to  the current low inflation, and relatively large rooms for further stimulus. Capital controls have reduced the impact of hot money flows into China. After the epidemic, the public has maintained active labor participation. At the same time, the most commendable thing is that the world has fallen into fragmentation and consensus are hard to build. Under difficult circumstances, China has already reached a consensus to focus on economic development. In the past few years, China also achieved significant advantages in the two major industries : new energy and vehicle electrification and intelligentization, both have been newly developed around the world, which reflects our creativity in a positive cycle. In the first half of the year, A-share fundraising exceeded 300 billion yuan. Adding the capitals from Hong Kong and overseas, China has become a hotspot for entrepreneurship and investment. We believe that the relative advantages of China's economy will be further recognized by global Investors.

After a sharp rebound, the price/return story is less attractive, compared to the end of April, but many companies can still be selected with good long-term returns. Coupled with many new creations and progress, even in the face of headwinds in the global macro environment, there are still many opportunities waiting to be discovered, and we are still prepared to avoid crowded places and select companies with long-term potential to invest aggressively from the bottom up to seek a sustainable return, while maintaining a dynamic assessment of headwinds.