Newsletter commentary Feb 2021

After the initial surge in Feburary, the market fell sharply, with huge fluctuations. There are several reasons for the market decline:

One is the market correction to the rally pushed by the unsustainable and rapid inflow of capital due to the “wealth effect”.

The second is that U.S. bond yields have soared, but long-term inflation expectations are difficult to continue to rise, so real interest rates have risen. China's 10-year treasury bond yields have advanced to the average level of the past 10 years, and there has been little volatility recently. Recent rally of commodities  is more of the cost pressure. In addition, the degree of internationalization of the A-share market is higher than before, and the linkage with overseas markets has increased.

Third, after several years of institutionalization, the institutions themselves have also increased their scale. Overlapping last year’s epidemic, the market’s pursuit of certainty has reached a high level, and it is difficult for some companies to match such high expectation. Moreover, this year's global economic recovery is more certain, and there will be many high growth from other areas that will impact the previous landscape.

We believe that from a short-term perspective of one or two years, last year’s epidemic accelerated the decline in interest rates, which deviated from the original downward track. At the same time, interest rates in many economies have reached zero. As the economy recovers, it is inevitable that interest rates will rise.  From a longer-term perspective, it seems difficult to find a reason why interest rates will return to a relatively high position. It is difficult for overall economic operations to tolerate slightly higher interest rates. One variable is the continuous fiscal monetization, which is directly sending money to the public. It may really create a lot of new economic jobs and bring a lot of real demand, but it’s not easy. 

In the short term, the CSI 300 forward price-earnings ratio has returned to within 14 times. At this valuation level, there are more of internal structural risks rather than overall risks. Some companies may not meet their earning forecasts. It is not a high position in the long run.

We feel the education to the public’s demand for stock assets and fund products has more or less completed. The excessively hot market in the past has made the inflow of funds a little faster. Market fluctuations are a good reminder, which may prompt investors to participate in the market in a more sustainable manner with more reasonable expectation. 

Our economy is still in a phase of opportunity, and our capabilities are unprecedented. Our policy space is still huge. This is our long-term basic assumption. In the short term, the pattern of China’s supply corresponding to global demand will change during the epidemic last year. “Dual-cycle”’s importance will increase.

The future fluctuations in the market may include: February data may see further evidence of China's tightening; worldwide changes in the management of the digital economy are more clear; the recovery situation of US demand, especially non-consumer demand; and similar The Hong Kong government's move to increase the stamp duty on transactions. After all, many governments in the world suffered a lot of financial deficits against the epidemic last year.

Our strategy:  lower expectations, accept more fluctuations , take a long-term view, and look for more diversified opportunities.