Newsletter commentary Sep 2022丨Patience is a Rare Virtue

  Patience is a Rare Virtue

In September, taking the desperate stickiness of overseas inflation, worries about the escalation of the conflict between Russia and Ukraine, and the deep correction in China stock markets due to the lack of a strong economic recovery, our portfolio's NAV had a decent performance this month followed by a noticeable drop.

We still maintain a very positive attitude toward participating in the market. Our short-term view is that some factors are gradually becoming clear. Although it will take time, positive changes have gradually begun to brew. In the medium term, during two years of the epidemic and the impact of the Russian-Ukrainian war this year, we see that the China industrial sector has made significant progress compared to that of Germany, Japan, and Europe. Plus, the relative status of the RMB has also risen a lot, although we are now feeling the pressure of the RMB's depreciation.

The market is approximately returning to the area at the end of April, but its current environment is more complicated. At that time, it was an emotional catharsis, and it was relatively clear about the future; also, there was a greater certainty that the market would quickly repair. Facing more uncertainties now, we can be sure that the relative advantages of the Chinese economy will become more apparent, which will reflect on the stock markets, although it may take some time.

We look at overseas inflation as still very resilient. The U.S. economy is still robust, especially consumption, and the current interest rate is still far from the neutral interest rate. Although the market has been impacted by a rapidly rising rate, the real economy feels that the actual interest rate is still negative, hence a still strong economy despite a falling market. In fact, it is inevitable that the market has begun to trade a certain degree of recession, which may happen in the first half of next year. Therefore, it still takes time to form stable expectations in overseas markets.

Economies such as EU were the biggest losers in the past period. The rapid rises of the US dollar index (DXY) in history were - at 160 in 1980s caused by the Latin American debt crisis, and at 120 in 1998 during the Asian financial crisis. Now the index is around 114, the market feels the strong devaluation of the pound, the euro, and the yen. Those countries are core allies of the America, and it is a notable change.

This change may be a reconstruction of the world economic map. We think the reconstruction has occurred, but there is only a lack of confirmation by an event. The epidemic or the Russian-Ukrainian war may be a such event. The economic strength of these non-US developed countries has gradually been replaced by China, India, Indonesia, and other countries. This has happened for years; however, the inertia of the hereditary system in the monetary and financial field is still huge, and now the inflation problem has arisen. 

For example, in England, the economic aggregate of the United Kingdom has been surpassed by India. While the financial industry is the most significant component in the UK, it has been unstable. The epidemic and the Russian-Ukrainian war have hit the second largest industry, tourism, and the industrial sector is small. The productivity level outside the London area is not high, unlike in Germany and Japan, while you can feel many things are missing in the world economy. There seems to be something lacking from their industry. However, the pound is still solid, so maybe something needs to be adjusted.

The developed countries have been enjoying a decent life for decades, and significant support is China's export of deflation. China's hard-working mentality has played a pivotal role in maintaining low inflation and low-interest rates under low growth, especially in the life of the middle and low-income classes. These factors are also the main support points for their social stability. In recent years the continuous high inflation has broken this cycle, and income growth cannot keep up with prices. It creates the beginning of the conflict. For instance, the result of the Italian election is a warning. Any rash idea of de-globalization and de-Sinicization has not been tested by these harsh realities.

After the escalation of the Russian-Ukrainian war, it may get closer to the climax of contradictions. A certain degree of compromise and reconciliation is needed in a chaotic world.

Moving back to China, we have experienced two difficult years. However, our global trade share has increased by 2 percent, which is a remarkable achievement, and it is still stable now with industry support. Data do not support those remarks about de-globalization and de-Sinicization. It seems that the energy advantage will still exist for a long time in the future even though there are differences in energy prices. At the same time, our industrial support may be more critical. 

Our traditional industries' market shares are increasing, while new initiatives are taking good positions. Indeed, the stock market will reflect the competitiveness sooner or later.  

A leading Chinese electric vehicle manufacturer has been preparing to sell its products in Europe with a 150% higher than domestic price, also more expensive than Tesla's related products. Moreover, the RMB is under pressure now, but the RMB index is stable.

We believe that the status of the currency may lag long behind the economic strength, and this significant adjustment of the global currencies may encourage everyone to rethink about the old pattern.

 A few years later, the RMB could buy almost all commodities except for the most efficient consumer electronics like iPhone. At the same time, China has virtually no record of using currency as a weapon. The revaluation of the RMB is just a matter of time.

Over the past two years, our active prevention and control of the epidemic have achieved good results. Our strategy is the application of Bayes’ theorem, which is to keep optimizing the prevention measures with the development of both the virus and our preparations. Future measures suitable for the new situation can be expected, which will have a very positive effect on the recovery of the service industry, improve employment and future income, and smooth the economic cycle.

In terms of market structure, we had some discussions last month to continue to be cautious about crowded trades, the market's overpriced short-term growth, and not enough focus on sustainability.

In summary, although the process is somewhat uncertain, the future is clear. Improvement is happening, and the valuation is still attractive. We continue to avoid crowded places and actively select stocks.