Newsletter commentary Oct 2020

In October, the market rebounded after the Chinese holiday. China’s economy continued its recovery. At the same time, the U.S. election as well as the overseas epidemic have also affected the market. However, the new lockdown has had a much smaller impact on the economy than the last time. 

The main clash points in the current market include: uncertainties at the macro level and the aggressiveness and competitiveness of many companies at the micro level; the optimism of the mid- to long-term market value and the deviation of current valuation of some companies from the historical norms.

Macro factors such as the epidemic, stimulus policies, and policy exits have brought uncertainty to the pace of economic recovery. The US election also has a great impact on the external environment and global short-term aggregate demand. Our investment tries to minimize the impact on these problems. The monetary environment of the domestic capital market has weakened sequentially. However, we also witnessed a new trend of increasing demand for A shares this year. We tend to believe that the latter force is more long-term. Since the beginning of this year, many companies have gone through various stress tests. They may also benefit from the lack of preparation of their competitors as well as their advantages in digitalization to further gain competitive advantage. This will continue even in the post-epidemic era.

In terms of valuation, taking the CSI 300 as an example, it is now difficult to give directional guidance. The overall valuation is in a relatively reasonable range. The valuation of some good quality companies has exceeded the historical upper limit. The difference this time is that there are a large number of good companies that have enjoyed valuation premium, while in the past companies with poor quality tend to enjoy premium. The latter situation is easy to make decision on. The former requires more consideration of rationality. We believe that first, the current interest rate environment is indeed lower, and the opportunity cost of investing in high-quality companies has dropped significantly; second, the market competitiveness of these companies is indeed very high, and their profitability and sustainability are different from before. Overall we believe that following the sharp rise of these companies, we will face a situation where it is more a decline in potential returns rather than large-scale capital losses.

In near future, we believe that the changes in the real estate industry are worthy of consideration. The industry has begun to drive efficiency from management after experiencing land and financial dividends, and there may be some changes in the total size of the industry.

Some traditional industries did not perform well this year, but those industries are still growing. We believe some companies with significant competitiveness have become appealing. 

In sum, current interest rate environment is low; people are getting more experienced in response to the epidemic; Chinese stock assets have become mainstream; and many companies have significantly accelerated the speed of creating value. We still hold a positive view towards the future. The uncertainty may come from changes in the regulatory rules for some large companies.