Newsletter commentary Mar 2025

The Fall of Monopolies and the Eternal Life of Competition

In March, the market initially sustained the momentum from February. However, as the AI-led rally lost steam, a pullback ensued. Overall, the market reverted to its starting position, undergoing substantial fluctuations. Indices that had previously registered strong gains, like the Hang Seng Tech Index, also witnessed significant volatility. There was a degree of sector rotation, and dividend focused companies performed relatively commendably.

Unlike in the past two years when post-Chinese New Year economic data was typically lackluster, this year, the data has signaled stabilization, with certain bright spots emerging. Consider the consumer sector: although overall consumption is not overly robust, it fares somewhat better than in previous years. Some emerging consumption segments have demonstrated outstanding performance. For example, the leading designer toy companies have swiftly expanded their global presence. In the case of Pop Mart, in a short span, nearly half of its revenue now stems from overseas markets. After attaining great popularity in Southeast Asia, these companies have also achieved remarkable success in Europe and North America. Chinese cultural and creative products are now being warmly received by global consumers, an accomplishment that once seemed nearly unattainable. This represents another major breakthrough following the extensive global recognition of China's manufacturing capabilities.

Similarly, despite the overall slump in the luxury market, the trailblazer in “Chinese ancient-style gold” Laopu Gold has achieved annual revenue growth of over 160% in 2024. This achievement not only mirrors cultural confidence but also indicates a transition towards self-rewarding and value-based consumption. The upward trend in gold prices has also provided a boost. From a corporate standpoint, it exemplifies the success of business strategies that transcend price competition, as these companies are presenting unique value propositions.

With traditional consumer demands largely met, China's consumer investment landscape is witnessing novel innovations. Although these developments might seem astonishing, they are, in fact, a natural outgrowth of China's robust industrial manufacturing base, which continuously generates new opportunities.

A Fresh Interpretation of Monetary Easing and Global Market Disruptions

Recently, the central bank offered a clear re-interpretation of monetary easing. It emphasized that monetary easing is already an established state, rather than suggesting a marginal move towards more easing. We believe that this year's economic scenario has the potential to deviate significantly from that of the past two years. Since the fourth quarter of last year, under the influence of proactive fiscal policies, the economy has already exhibited remarkable changes, and this momentum is likely to persist. Meanwhile, the implementation of various anti –overcompetition measures could also exert a positive influence on domestic price stability.

One of the biggest sources of market turmoil in recent times has been the policies of the Trump administration. The impending tariffs are anticipated to introduce even more uncertainty. Although Trump's policy framework accurately pinpoints crucial issues, the proposed remedies seem insufficient—at times, even counterproductive. The aim of rejuvenating American manufacturing is a worthy one. However, the utilization of tariffs as a means inevitably stokes inflation. The impact of inflation extends well beyond Treasury yields, debt issuance costs, and efforts to curtail deficits. It substantially affects the real-life economic experiences of the general public.

On the geopolitical stage, the path to peace between Ukraine and Russia remains obscure. Moreover, Trump's approach has clouded the U.S.'s stance among its allies. The Department of Government Efficiency (DOGE) has yet to tackle the most critical aspects of fiscal expenditure and is already grappling with significant challenges. Additionally, Trump's tariff policies obfuscate the fact that the U.S. enjoys a substantial services trade surplus with other nations. If the U.S. forcefully reduces its goods trade deficit, fundamental questions arise: How will dollars be channeled overseas? How will these dollars be recycled to support U.S. stocks and bonds? If the dollar's global preeminence weakens, what incentive will other countries have to continue permitting major U.S. tech giants to operate freely in their markets? By attempting to transfer domestic economic pressures onto the rest of the world, the Trump administration risks precipitating far-reaching consequences, endangering the dollar's status, the global operations of U.S. technology firms, and America's overarching leadership position on the global stage.

The Breaking of Monopolies and the Shift in Valuation

When a monopoly begins to be dismantled, its valuation experiences substantial alterations. The very fabric of American business has long been founded on monopolies. Historically, the U.S. occupied a unique position, and many of its companies did too. Traditional investment theory centers around identifying monopolies and economic moats, which is not inherently flawed. Monopolies offer high profit margins and stability, making them highly appealing to investors in the short run. However, from a macroeconomic perspective, monopolies inevitably breed inefficiencies and ultimately fall prey to the allure of rent-seeking, leading to a loss of competitiveness. If the broader system remains unaltered, this decline can be difficult to detect. Many of the so-called “ecosystems” promoted by companies are, at their essence, about maintaining monopolistic control, positioning themselves at the center or the apex of the hierarchy.

Currently, monopolies are being fragmented. The era of American dominance is waning, and the monopolistic strongholds of many U.S. companies are disintegrating. Some U.S. industry leaders who once seemed almost invincible in their achievements now find that their businesses are just one among many in a highly competitive arena. Ironically, the “Make America Great Again” initiative might ultimately propel other countries to build their own resurgences. Europe, which has been fiscally conservative, is becoming more self-reliant. China, which has long pursued an independent development trajectory, is now strengthening it with proactive fiscal policies. Other countries are also starting to assert greater control over their economic destinies. What was intended to restore American preeminence may instead hasten the transition from a unipolar to a multipolar world. Simultaneously, the perception of companies that were previously mired in the intense competition could now change. While competition may seem harsh for individual companies, it does not necessarily spell macroeconomic doom. In fact, a highly competitive environment often elevates the overall standing of an industry. If investors can broaden their focus from individual companies to the larger economic landscape, it could trigger a revaluation of entire national markets. And for individual companies that successfully expand into broader markets, this presents an opportunity for revaluation.

April is likely to be a month with high volatility. Domestically, economic data will gradually disclose the true strength of the recovery. Externally, global shocks and fluctuations are expected to intensify. While we maintain a mid-term optimistic outlook on Chinese assets, we will remain vigilant and actively monitor market changes.