Newsletter commentary Mar 2023

In March, the market’s volatility and trading sentiment varied relatively significantly. The performance related to post-COVID recovery was weak, but the performance related to Artificial General Intelligence was very strong.

During this month, we experienced the banking crisis represented by the Silicon Valley bank in America. What happened was that within a month, the U.S. stock markets had gone through the process of the outbreak to the temporary subsidence, and the market also recovered to the pre-crisis level.

We think monetary policy 3 is critical in causing hot inflation this time in the United States. During the epidemic, the household has remained almost unscathed, as well as the government’s balance sheet and people are being optimistic about their future income- this is a good sign, but there is no free lunch in the world. The price is inflation. While Inflation is beyond everyone’s expectations and cognition, the policy shift is too late. The cost of being too late is being compensated by the speed that creates an illusion and dilemma for the market. 

Besides, the impact is also different from usual, so the relationship between interest rate hikes, economic cooling, and inflations’ correlations totally varied differently this time. In fact, rapid interest rate hikes significantly impact the financial market more than the real economy. The neutral interest rate is a long way off, but financial markets have first faced the speed of rate hikes. So far, SVB has only reflected the impact of the financial market. After the interest rate hike, the loss on the investment side directly impacts some financial institutions with severe maturity mismatches. In summary, we think financial institutions may bear the economic downturn, including commercial real estate loan losses, which are so-called losses of assets for banks in the coming future.

Continuing to dig further into SVB and CS crisis, everything has a cause and effect, but it seems the causal connection takes a significant time or even was not acknowledged in advance. The incidents of SVB and CS are the adverse reactions of financial institutions in developed markets to the complex economic environment. In general, financial institutions’ businesses are business suitable for a peaceful age. In an era and course of turmoil, the operational risk of financial institutions is very high.

Looking back at financial institutions in developed markets- the past 20 years have been weak. In contrast, China's financial institutions' economic environments has not been solid since 2012. The benefits of expansion are the whole society, but financial institutions often bear the cost—especially some high leveraged and aggressive financial institutions.

Moreover, the future will not be a peaceful era for long. The problems of these financial institutions are probably a reflection of the end of long-term debts and the outbreak of imbalance problems. It is often associated with the Chinese old saying, "one feels the pinch when he is in trouble and stretched thin." It is challenging to overcome the current drastic changes in history, and it is just getting used to the current environment without considering the reality of a situation.

In contrast, we can look at China’s recovery compared to the situation in the United States. Because we have not written a cheque directly to the public, our economic growth rate in the three years of the epidemic has been relatively solid on average. Therefore, the actual starting point is not low. The overall situation conceals some structural differences domestically. For instance, exports are pretty good, as well as infrastructure, plus investment in manufacturing is robust, even though consumption is challenging, and real estate has experienced intense turbulence.

By the time we got out of the epidemic, consumption had become what everyone had expected. The scene brought about by the business scene recovery before the Spring Festival encouraged everyone’s expectations, but in fact, the business scene recovery is only the first step. The second step is to improve income expectations and keep up with it, and then the third step is possibly take-out excess savings and consuming it with confidence. At this moment, we’re in only the first step. The second step is still in process. Despite this fact, many people’s salary cuts have affected income expectations in China.

This part needs further recovery of economic activities to drive income expectations. As we mentioned above, we haven’t written a cheque directly to the public, and the base is not low. Therefore, this will be a slow process, but it will not be absent because the economic revival of confidence is a process of self-adaptation and strengthening. We will see and note that creating a friendly operational business environment among all levels of the government will also pay off. 

Assuming it is all a flywheel for the two largest economies. America has no deceleration and may have a slight acceleration in the middle so that it will get out of the epidemic quickly, but the price ultimately is inflation; In China, we are a flywheel that has decelerated, but it is not recovering from a static state, the price is that it needs some points of time, we have felt the efforts from all levels of government to refuel.

 In China, on the one hand, real estate sales are significantly strong. The completion of properties may reach the highest point at the time period in history, but the market may not have fully adapted to the new normal, which is not easy for the whole world to grow. On the other hand, car sales are going through a period of weakness after rush-buying at the end of last year, and consumers are still in a wait-and-see mode after various price cuts. However, we should still see that price cuts will boost sales. This is a story about revenue expectations.

More importantly, a sudden boom story of Artificial General Intelligence that broke out in March is surprising and exciting news for the capital market. Although we are still learning about it, this will be a tremendous revolutionary opportunity for productivity improvement and change in many industries. More insight is still needed into the relationship between industry-level models and how to reshape the value chain. Artificial General Intelligence should have many visible applications and efficiency with increase because it may develop extremely fast, and its impact on many industrial structures and income expectations is also unclear. Overall, we confirm that this is a super-large-scale thing, but the effect on life and production may differ from the secondary market's reaction. Many may be due to lowering the threshold for entrepreneurship and increasing the possibility of volume. As a result, Artificial General Intelligence is a big theme. We invest while learning and we will pay more attention to the opportunities of big companies.

Moreover, we look forward to seeing the benefits brought about by increased exchanges and communications after China and the world are better connected. Continuing to watch TV and the Internet will significantly improve our understanding of each other. After the re-opening happened, people are going to start traveling to see if they would increase their interest in China to boost both confidence and local knowledge. Chinese People here as always, strive to pursue a better life for themselves with both hands. Over the past period, our voices and opinions have been increasing, which is very important for long-term investment, because China's capital market needs more people to reflect on understanding the size of China's economy in the world. At the same time, it needs to gain trust, understand and learn from the worldwide nations as the second largest economic powerhouse. 

 Many recent phenomenas remind us that a man of virtue can never be isolated and neighbours must exist, as new situations cannot be waited for but must be created by its own hands. In fact, most people are more accustomed to explaining the past rather than creating the future.

According to the above observations and our understandings, we maintain actively to invest in the coming future. Meanwhile we continue to support a positive view on the consumption-related sector, such as e-commerce and express delivery is a great combination for replacement of actual consumption. In the past period, e-commerce platforms have changed their business strategies. The effect is limited. Each platform has formed its business driver and competitiveness amongst consumers. Each platform emphasizes on its one or two strong selling points, to play monopoly and dominance is very challenging, at the same time, the loss outweighs the gain to make a structural adjustment. 

We also continuously maintain the expanding story of SOEs. The assessment objectives of state-owned enterprises have come close to the perspective of a securities analyst evaluating the value of a company. It is not a temporary change but a natural result of China's long—term economic development. 

Now the market is challenging and a rocky road is ahead of us because it is showing preservation ratio of game theory. For example, some funds withdraw from other investments to invest in Artificial General Intelligence. The short-term partial profit effect has encouraged some investors to increase their stakes further. The enthusiasm for new things in A share still needs to be improved. This is a good starting point, it will promote innovation, and there will be some costs, which should be digested afterward; the profit effect of the overall market is not strong now, but we judge that there will be more and more evidence to verify the improvement of China's economy. The market will respond to this. At one-point, incremental funds will gradually flow in. From other point as a grand narrative has been happening and emerging, to quote a traditional Chinese poetry here is that "it is because of being within the mountain, no one will know what is happening”.