Newsletter commentary June 2021

The market showed obvious differentiation in June, with ChiNext rose significantly while CSI 300 fell.

China’s proactive credit tightening, the slow-down of China’s economic growth and the continuing overstimulation in the US have been the general background since this year. Now the Fed has stopped pretending not to see the prevailing high inflation. The Inflation Trade has ended while the market has shifted to growth. The continuous overstimulation of the US has largely boosted the world economy, however made greater impact on the global financial market. The rapid ongoing normalization of China’s monetary policy has not significantly affected the market thanks to the positive effects from export and to a robust US financial market. Relocation of savings has been encouraged in the vigorous market, resulting in continuous capital inflows into the active stock market against a lackluster general monetary environment.

In the future, structural opportunities will still be the main market features, in view of the approaching of the Fed’s policy normalization and the China’s not strong economy. Nevertheless, thanks to the speedy withdrawal of China’s stimulative monetary policy and the relatively conservative fiscal policy, there will still be a large room for us to operate in a reverse way, thus to limit the downside risks from the overall economy.

The structural opportunities are not only supported by the macro background but also by the bottom-up changes that are really happening. Save the valuation, the progress of various industries has been remarkable. For example, the earning growth of the semiconductor industry has been considerable with many companies gaining large profits; the market value of some sports goods companies has surpassed Adidas; the domestic auto manufacturers have seized the historic opportunities of  intelligentization and electrification, set to beat the joint-venture peers; the pharmaceutical industry has seen companies qualified to be listed from every link in the chain from raw materials to final drugs, well involved in cell therapy, gene therapy, vaccine development and other new fields, compared with three to five years ago when only a few players successfully transitioned from generic drug manufacturers to innovative drug makers; the Chinese companies in the PV industry have even been leading the progress in technologies.

Save the valuation, opportunities are everywhere. Even in the financial services sector, many innovative Chinese companies are beginning to have good business from overseas. As well as in entertainment and communication area, several Chinese companies are becoming the choice of overseas customers. This is the foundation for the positive long-term view on China assets. 

On top of that, China asset has gained higher recognition by the overseas investors. In addition to financial assets, FDI has rebounded significantly recently.

Under the background of carbon neutrality, although the manufacturing-based Chinese industries would face big challenges, it is more of opportunities in the future. China’s chance of success will far exceed those of the other countries, as the latter will have to start building the complete system while we will be improving ourselves from already existed mass manufacturing and large-scaled market. Currently, the issue of investment is not a lack of opportunities, but mainly a problem of valuation.