Newsletter commentary Dec 2024

In December, the market maintained a transaction volume of 35 trillion yuan, following 36 trillion yuan and 41 trillion yuan in the previous two months. The free-float market capitalization is around 36 trillion yuan, while the financing balance remains at a historical high, raising concerns about sustainability. The market is highly fragmented, with the price-to-earnings ratio of the CSI 2000 exceeding 80 times. Due to the year-end effect, dividend stocks have risen, and some AI-related concepts still have momentum. However, many stocks are showing signs of being overvalued and vulnerable at high levels.

Looking ahead to 2025, broader fiscal spending is expected to become more proactive. Firstly, the issuance and utilization of government bonds will be accelerated. Secondly, the central government will relax restrictions on the issuance and utilization of special bonds by local governments. This includes streamlining approval processes, expanding the scope of use, and increasing the proportion of funds that can be used as capital, thereby enhancing capital efficiency. Thirdly, the drag from declining land transfer fees will lessen. Fourthly, there will be active use of quasi-fiscal tools, with state-owned enterprises and policy banks taking on more fiscal responsibilities. Fifthly, the rapid implementation of local government debt swaps will provide local governments with more resources for economic and social affairs. In fact, the perceived level of fiscal spending is likely to be much more positive compared to the past two years.

In the medium term, a meaningful balance between production and consumption is expected to develop. Constructive spending by various levels of government will decrease, while the proportion of spending on public welfare will increase. The rise in the share of consumption will depend on the enrichment of service sector consumption supply. This is an exploratory process. Another approach to adjusting production and consumption is to increase overseas manufacturing, which reduces the pressure on exporting goods. Shifting from exporting goods to establishing overseas factories is a long-term strategy.

Over the past few years, exports have offset the decline in the real estate sector. The risk of a significant further decline in the real estate sector is now minimal, and the proportions of the manufacturing and service industries have already reached a high level. The 10-year government bond yield has also reached around 1.6%, and the relative value between stocks and bonds will eventually become evident. Fiscal spending has substantively shifted towards a more proactive stance, and anti-involution is on the agenda. After experiencing the impact of Trump's new policies at the beginning of the year, the market will pay more attention to the domestic economic situation. A salary increase for civil servants is a positive signal. The gradual improvement in income expectations and the stabilization of various asset prices have the potential to create a different economic atmosphere compared to the past few years.

The structural valuation discrepancies in the market are somewhat similar to those at the end of 2020. Back then, the issues were primarily with blue-chip stocks, whereas now, the concerns are more focused on non-blue-chip stocks. Overall, the impact on the market remains manageable. We continue to focus on high dividend yields, consumer sectors, and overseas expansion, as well as the implementation of AI in some companies.