Newsletter commentary May 2021

The market rebounded in May. In the previous period, the overall valuation pressure had been moderately released after the market went down. In the meantime, China’s 10-year sovereign bond yield dropped, resulting in the equity risk premium returning to the lower band of the long-term average. Another consideration is the actual attractiveness of the equity risk premium would be slightly higher than what the historical data suggested, due to the sharp decline of return on wealth management products.  After the release of annual and quarterly results, the market has been looking and herding for new stocks, while continued concentrating investment on the out-performing names.

The Incremental social financing scale and M2 growth dropped dramatically in April. The 10-year sovereign bond yield did not rise but fell even though the commodity prices increased a lot, indicating that the economy will still be affected in the future. The government intervention in the commodity market will largely help restrain the panic towards PPI surge, hence a relief of the pressure on profits of the manufacturing industry. Policy coordination will diminish the chaotic expectations beyond supply and demand. In the future context of carbon neutrality, a clear policy roadmap will be of great help to market expectations.

Since the pandemic, combined with our policy capacity and future industrial layout, our potential relative advantages in productivity should have expanded. This should be the fundamental support for the long-term appreciation and internationalization of the rmb, which will become a driver of China asset price in the long run. If we simplify the potential of an economy as the ability to use energy and to process information, we can clearly see the improvement of China. In agricultural society, energy was mainly food that rely on photosynthesis. Since industrial revolution, the fossil energy (energy accumulated by photosynthesis in the past) has been used, which greatly increased the density of energy that has been used by human. However, the uneven distribution of fossil energy resources has brought geopolitical risks and now carbon emission problems. The new energies for the next generation include wind, light and nuclear energies, in which areas China has already shown its leading position. Ultimately, China has transformed the energy industry from an industry relying on natural endowments to a manufacturing industry. This is the advantage that will gradually get China out of the bondage.

Looking at the information processing ability, the low fees of our transportation network and Internet are the basis for processing mass information; the considerable amount of quality population is the carrier; and the multi-layer capital market provides strong support on information transmission and incentives. All these have become a reality during the past few years.

If we are patient enough, we can see a bright future over the short-term disturbances. Different from the past, China is going to participate in almost every change in the frontiers of mankind. At the same time, thanks to the position of China with manufacturing strength along the industry chain, the commercial value has been largely different as it is much easier to transition from manufacturing to design and marketing than doing the reverse. The barriers set by design and marketing functions are vanishing because the commercial environment has changed - Internet has been popularized and the contacts between manufacturers and consumers became more direct.

Under the great changes of the times, successful investment depends on the implied long-term yield of a certain asset. We are striving to find out assets with future high yields.