Newsletter commentary Apr 2024

In April, most of the major indices experienced slight gains. It is worth noting that the dividend index increased by 2.4%, but it left behind an upper shadow of about 5.5%. Meanwhile, the CSI 2000 index dropped by 3%, reaching a maximum decline of 15% at one point. The Wande small-cap index also declined by 5%, reaching a near 20% decline at one point.

Our interpretation is that the overall market has shown a positive sign of recovery. A portion of the funds has gradually increased their risk appetite. The weakness in small and mid-cap stocks, as well as the introduction of the new “National Articles 9” (guidance issued by the State Council regarding the development of the securities market), have had a significant impact on companies with limited value and poor governance structures.

Overall, there were several noteworthy events during this month. 

First, the introduction of the new Nine Policies (referring to government guidance and rules for the securities market) took place. Historically, similar documents were issued in 2004 and 2014, and they had a profound impact on the securities market. This time is no exception, as the new policies are expected to have far-reaching effects, particularly in rebalancing the financing and investment functions.

We believe that this will rapidly enhance the investment value of the market. The fundamental investment value of A-shares will be better safeguarded by the new regulations, which will attract more investors to return to the market. A-shares are transforming into a market where "large shareholders can only make money if they lead small and medium shareholders to make money." This is a very positive change for small and medium investors. In the long run, it will highlight the advantages of stocks over real estate and bond asset classes.

The second noteworthy development is the positive changes in the Chinese economy. After experiencing the disappointment of high expectations at the beginning of the year, the market has remained cautious, primarily due to concerns about inflation, real estate, and local government debt. However, in the first quarter of 2024, GDP growth reached 5.3%, far exceeding expectations. Furthermore, there have been some positive signals in terms of prices. If there is further reinforcement of requirements related to energy consumption, it may contribute to a rebound in prices.

The real estate sector has not made significant moves to quickly change market expectations. The market is primarily reacting to the sharp decline in year-on-year data for first-hand home sales since the beginning of this year. There have been significant changes in the monthly distribution of many data points after the outbreak of the pandemic compared to before. For instance, at the start of 2023, many economic activities reached high levels, creating a high base effect. Additionally, after the pandemic, the peak and off-peak seasons of many economic activities have shown a pattern of even stronger peaks and weaker off-peak periods. This makes it challenging to seasonally adjust year-on-year data.

Taking real estate sales data as an example, if we compare the decline on a year-on-year based on the data from 2019, the current decline is smaller. In conclusion, the month-on-month sales do not worsen, as the overall sales data for this year could be better than in 2023 due to the natural decline in the base. If we also consider the favourable sales data for second-hand homes, it indicates that the demand for housing among residents remains relatively strong. Once the real estate sector stabilizes, it will also help alleviate concerns related to local government debt.

The third notable development is the significant increase in many overseas markets compared to the relatively weak performance in our local market. However, this situation has started to change since the beginning of this year. When considering the impact of exchange rates, the performance of the Index CSI 300 and the Hang Seng Index is not inferior to that of the Japanese, Indian, and South Korean stock markets. This has exceeded expectations at the beginning of the year. Similarly, the US stock market has also experienced significant volatility, with inflation showing higher stickiness than initially anticipated. The expectations for interest rate cuts, which were initially projected at six times, are now highly uncertain. Plus, there has been an unexpected slowdown in economic growth in the first quarter.

Moreover, AI-related stocks are still in the infrastructure stage, with significant investments being made while waiting for returns. It is uncertain how long one will have to wait. Either further technological breakthroughs will drive widespread application, or at some point, there will be pressure on infrastructure development.

Domestically, the economy grew by 5.3% in the first quarter, and prices are gradually rising. There is significant uncertainty regarding the exchange rate in Japan, and the Bank of Japan is finding it increasingly challenging to balance a combination of rapid depreciation of the currency, low-interest rates, and increased inflation risks. This task becomes even more difficult in a situation where US interest rates are high. After a somewhat disappointing year in 2023 due to the pandemic, it seems that the Chinese economy is regaining investors' attention at its own pace in 2024. There have been signs of consistent growth in capital inflows from the north since the beginning of this year.

We tend to believe that the COVID-19 pandemic has had a significant impact on production in China over the past three years. So far, we have witnessed considerable progress in export growth partly due to this. However, the pandemic has also brought sustained pressure on low prices in the post-pandemic period.

Because of insufficient international communication, many investors may not have a full picture of China's progress. For example, the progress of the automotive industry in the past five years is just a microcosm of China's industrial development. The recent Beijing Auto Show is an example of the varying performance of domestic and joint venture vehicles.

As communication recovers and things move as normal, the strong competitiveness of the Chinese economy, coupled with gradually warming prices, is likely to become more attractive compared to other economies experiencing a stage of stagnation.