Newsletter commentary Dec 2022

In December, our portfolio reflected that we maintain a positive investment approach to the post-pandemic recovery. The A share markets had experienced pressure from a re-opening perspective to short-term realities-soaring infection figures in China, and the market performance was weak. For instance, the CSI 500 and CSI 1000 significantly lagged the SSE 50 and the CSI 300 index respectively.

Taking the current circumstance about soaring infection having a short-term impact across the country on the economy is significantly direct and looking at the number of subway passengers in the city to the sharp drop in inter-city exchanges, those ratios gauged the economic data in December and the fourth quarter will be challenging. From the earlier infection, to judge from the situation in Beijing at the peak, there are signs of traffic jams again lately. The whole country is expected to go through another one or two months. It should get better after the Chinese Lunar New Year.

Meanwhile, looking forward to expecting the outlook of the Chinese economy in 2023, on the one hand, it mainly depends on some supportive policies that were released last year to play a full role in the case of reduced or subsided epidemic interference. There is no strong stimulus policy guidance, and the market is slightly disappointed. In the context of the actual demand for monetary policy to look at its interest rate, it is near the lowest in the past ten years. This year's significant decline in residents' credit demand has affected the expansion of total social financing.

On the other hand, the demand for housing purchases next year should no longer be a main drag factor, the total amount of fiscal stimulus should not be overestimated, and its efficiency should be improved.

Moreover, the biggest hope for next year is whether the excess savings rates from the past few years can return to the average level and whether some restorative consumption can be improved, as consumption components account for approximately 70% of GDP. Consumption is a vital part of the economy. The Chinese government neither did follow other countries-given the money directly to boost its economy nor were there low base figures. Therefore, vindictive growth may be challenging, but an evident recovery should still be expected because the epidemic is highly disruptive to the actual consumption scene. However, we favor e-commerce related to the recovery of the consumer market instead of the consumer sector.

From investing in Chinese stocks point of view now, we do not see any tremendous track stocks opportunities, as the previous track stocks have also entered the middle of the industry cycle, the stage of double-boosting valuations and earnings has passed, and the difficulty of the investment landscape, it is a global investment issue. Investment opportunities are subdivided into sub-sectors in the coming future, and this is also a big challenge for investment managers worldwide.

Several sectors will be worth paying attention to investing in Chinese stocks, particularly cyclical, induvial opportunities, and Chinese SOE state-owned enterprises (SOEs) due to the lack of track stocks and some sectoral investment opportunities. Notably, SOEs may be on the transformation cycle from the perspective of investment, which used to be an investment function at a prominent stage. Now the process of the sources of fiscal revenue has begun to rise. Therefore, the capital market's valuation cycle is vital, despite cyclical opportunities being excluded from economic and industrial development.

Overseas demand may encounter more significant pressure in 2023. The pull of overseas exports in the past few years had been turning into stress, which offset the domestic demand cycle. For many Chinese companies, this will bring little growth. We will discuss more details about industry views at the annual investment conference.

On the whole investment outlook, the significant changes in the investment environment are reflected in the context of inflation, interest rates, and globalization considerations of safety and economy equally important. Meanwhile, to chase a certainty in investment or the change in the environment of so-called “lying down to win.” There have not been many new stories to emerge, and after the epidemic, there will be changes in economic behavior that we have not thought of now. These will affect our investment, and investment has also entered the ear of lean production. There will be fewer big fish and big meat in the future, while small fish and shrimp are also excellent. As investment is always a relative from this point of view, small fish and shrimp may be the most nutritious now.