China Onshore
Zhenqi Zhang
During 24Q2, we saw the signs of economy recovery momentum weakening. Amid inventory reduction, prices remain inelastic, signaling little improvement of the supply-demand dynamic. Asset prices have been adjusting to assumptions that both the short-term marginal weakening of fundamentals and a lack of long-term growth momentum. In this environment, bonds with low volatility and high-dividend quality assets remain viable for core portfolio positions. However, as negative expectations are gradually priced in, slight positive shifts in policy or fundamentals could trigger a market sentiment reversal.
For equity, we adopt an enhanced dividend-focused strategy, selectively investing in oversold sectors with growth potential. Our focus centers on three key sectors: (1) Technology manufacturing: subsectors that are identified as new quality productive forces, with clear business model and well-positioned competitive landscape, and benefit from global industrial trends; (2) High-quality stocks with reasonable valuations that are expected to increase dividends under the 3rd Guideline for Capital Market; (3) Energy sector that have limited supply and fewer competitors post 24Q2.
For bonds, economic recovery momentum remains weak, and the limited supply of assets continues, both of which support bond prices. However, exchange rate stabilization pressures are capping the potential for high returns, thus making it crucial to keep a close watch on capital flow and key economic indicators. Convertible bonds have recently experienced fund outflows due to delisting and credit risks. Potential excessive market corrections could create investment opportunities after these risks fully priced in. We shall employ a prudent right-side investment approach.
Yilei Huang
Looking at the medium to long term, we hold the conviction that China equity are poised to deliver substantial returns. Indeed, China economy is currently facing challenges such as growth slowdown and complicated global environment in the short term. Yet, these concerns have been mostly priced in. CSI 300 and HS Index are trading at PE ratios at 10, in stark contrast to the S&P 500 with PE ratio over 25. A slower GDP growth doesn’t necessarily translate into diminishing stock market returns. Our analysis shows that there is no significant differences of stock performance between emerging markets and developed markets; the relation between economic growth and stock returns is nuanced and needs closer examination.
Currently, we observed that there has been nationwide or even globally leading Chinese companies in various sectors. These companies have sustained high ROEs, some of which have ventured into global markets, yet their valuations have rendered under market downturns. Moreover, regulatory initiatives, such as the “Nine Measures”, are promoting better shareholder returns. Therefore, we believe that with low valuation, those good companies can bring substantial returns.
