Newsletter commentary May 2024

In May, the overall market fluctuated slightly, with the small broad-based index falling around 2 percentage points. We believe that the overall stability of the market has been some recovery. Plus, investors’ expectations for both the economy and the stock market continue to improve.

In this month, the tone of real estate policies has changed quickly, basically shifting towards a state of not discouraging consumption, or at least not restricting it. As interest rates and down payments have been significant declines. This is an adjustment reflecting the current real supply-demand situation, after a period of control measures. The contradictions in the real estate sector have shifted from excessive demand in previous years to weak demand. Supply has also shrunk substantially, while real estate companies are facing operational difficulties. But real estate transactions in many areas have also started to shift towards existing housing stock.

After the adjustment, the risks in the real estate sector have been released to some extent. The new policies are helpful in establishing a bottom and stabilizing the fundamentals. The market's earlier short-term investment feedback on real estate-related stocks may have been overly optimistic.

Despite real estate still being a drag this year, the economy has achieved good growth driven by exports. By the second half of the year or next year, the growth is likely to become more balanced.

Up to now, the positive effects of low interest rates on the economy and the stock market are still ongoing. Under the low interest rates circumstance is a decline in capital returns, making it difficult for various industries and businesses to make money, which has also affected people's expectations in general.

On the other hand, low interest rates themselves can also be helpful for the economy, for instance boosting demand in the real estate sector. The decline in mortgage rates has significantly increased the purchasing power for durable consumer goods like housing. Similarly, the low interest rates have also continuously increased the value of assets with high dividends.

Even though in a weak real estate environment, market expectations for the economy have started to stabilize, though a positive outlook has not yet formed. The current stabilization is more a transition from a path of confusion to finally seeing some positive signals, for example in exports and some service consumption data. Some of these positive signs have been persistent for a while, but they are still interpreted as periodic matters.

The structure of the Chinese economy has undergone significant changes before and after the pandemic. This change still needs to be gradually adapted to. The current signs of stabilization are positive indications. The previously dominant real estate-centered economic cycle system has been gradually replaced by others. The old cycle system was simple and clear, with sufficient dominance. After this transition, what it will become is something that everyone is adapting to and creating.

The good sign now is that the negative drag from the real estate sector is gradually being offset, and new growth areas are emerging. Over time, as factors like prices start to return to normal, it will give people greater confidence.

In the past period, the banking system has continuously made efforts to reduce the deposits cost, which has become less challenging than several years ago as there are more deposits. Reducing the deposits cost provides support for the real economy and maintains the bank's sustainable development margin.

As low interest rates are likely to be a long-term situation, which will have a long-term impact on market participant’s investment styles. Particularly, the banking system now has accumulated many deposits and some smaller banks have started to shift towards funding long-term bonds which significantly impacts the prices of long-term bonds.

In our view, just a matter of time before a portion of the massive funds in the banking system will seek other ways out under continuously declining interest rates, and equity assets are inevitable. Compared to real estate and bonds, many equity assets still offer a high cost-effectiveness. However, it is not yet a consensus.

Overall, the most cautious sentiment is changing, being supported by economic data, and the cost-effectiveness of equity assets having improved.

Looking forward, edge AI is more commonly used in the industry, more companies are publicly announcing shareholder return plans, and many industries after reaching a point of saturation, are seeking change and industry consolidation. We are in a phase where the economy is gradually breaking free from the constraints of real estate, and the stock market is increasingly focusing on returns.