Newsletter commentary Jan 2023

In Jan, the stock markets continued a rally since November last year. In fact, the market lacked clear direction after China’s loosened COVID policy in December last year and played very cautious. However, the market reflected a positive expectation before the Chinese Lunar New Year holidays while the high-frequent economic data were released. At the same time, the market has adjusted very quickly and gone up all the way. We maintain an actively investing view.

According to adjusted market expectations, these economic data have yet to keep up entirely. Still, the high-frequent financial data of the Chinese Lunar New Year shows that the epidemic's impact has been minimal as it will take time to transform into economic behavior fully. For example, some short-distance travel and mass consumption revivals made the market see that the essential recovery of the Chinese economy this year is hopeful.

The current difficulty in the market lies in decline in reasonable valuation after the sharp rebound since November. At that time, the decent attractive valuation was good enough to see attractiveness as long as there were optimistic expectations. After experiencing the Hang Seng Technology Stock Index and KWEB nearly up 70%-100% and an approximate 20% rise in the CSI 300 index, finally, the market for filling the hole is ended, and the following step is to improve the economic data to open up further a room for the next level of the rally. Taking the valuation of some typical stocks as an example, according to market consensus predictions, Tencent has returned to around 25 times in the year of 2023; also Kweichow Moutai and Li Ning have both returned to about 30 times in the year of 2023, plus the leaders of emerging manufacturing industries have reached to approximately 25 times. Further rises to need the support of optimism and strong coming economic data. We are still waiting to see optimistic sentiment leads to gains- the cycle of capital inflows and strong financial data.

Domestically, we tend to believe that this year must be a year of economic revival, accounting for some favorable conditions, for example, excess savings, an unprecedented mobilization of collective wisdom and efforts to boost the economy, and recovery of the economic scene after the epidemic has passed; whereas, there may not be many new stimulus policies this year. At the same time, we will not have large-scale money distribution; therefore, our recovery path and speed may be Chinese style, mainly relying on internal regain of confidence.

Outside of China, what happened in developed markets has been ignored for some time. This year's inner certainty of the Chinese economy is far higher than external factors. After the Chinese Lunar New Year holiday, some external noises began to emerge again, and obviously, the stock price will be more sensitive after the period. On the one hand, the Bank of Canada indicated that interest rate hikes might be coming to an end. The pace of the Bank of Canada should be representative of developed countries other than Japan. The increase in overseas risk appetite also reflects this, but the pressure on the economy may be shown in the stock transaction in the future. It depends on the speed of interest rate fall after peaking, which is still relatively vague.

Under the current market’s circumstances, we believe that after filling the hole, there will be more bottom-up opportunities. The price-performance ratio of many first-tier companies is not as good as other options. However, we are relatively optimistic about e-commerce, express delivery, some state-owned enterprises (SOEs), and some chemical stocks. Moreover, some cyclical stocks may have good opportunities after experiencing the impact of the short-term contradiction between supply and demand. We do not have a strong view about real estate. We are cautious and skeptical about the prevalent industries in the past few years. There are only a few alpha opportunities because many companies in the fourth quarter of 2022 will be pitfalls in operation, and those firms that can resume normal operations in 2023 will be better.