Newsletter commentary Mar 2022

The market fell sharply in March with the major indexes largely fluctuated by more than 10%. The China Concepts Stocks and the Hong Kong market were also extremely volatile.

Although the movement of the market was beyond our expectations, we remained active after assessment. We believed that while the market amplified some short-term shocks, it also reflected several long-term changes as short-term ones. The current wave of coronavirus in China has increased the concerns about the impact on the economy, but we have seen that situation in most affected areas was quickly brought under control after the new anti-epidemic policies were established. With the deepening of our understanding about the new variants and the further improvement of anti-epidemic barrier, we can achieve a new dynamic balance with the virus and control the impact on the economy within a certain range. Our prevention measures will be optimized in a dynamic way as we know more about the virus, about its impact on the economy and as a better preparation is in place. Since the Russian-Ukrainian conflict, concerns have risen sharply about the space of China’s economic growth. As the most important promoter, beneficiary and contributor of free trade, China certainly hopes that globalization will continue. With its current domestic market size and industrial production scale comparable to that of the entire G7, the world needs China more than China needs the world. People who blindly worry about the reversal of globalization and unable to make progress ignore that the global economy is hardly able to bear the cost of a rapid reversal. We feel changes in the trends, but we know that slow changes have completely different implications for investing from immediate changes. We don’t think the world is ready for high inflation and recession following a rapid reversal of globalization. At the same time, the future of China mainly depends on its own efforts and its cooperation with a wide range of countries. In this regard, based on common interests and the trend of multi-polarization, we hold an optimistic outlook. The expectations for China’s economic growth have been lowered, and concerns have increased in the market due to the epidemic situation. We think that China has entered a stage of high-quality economic development that relying on the old measures is unrealistic. With the increase of external shocks, fine-tuning of policies can be expected. 

At the beginning of the year, US stocks fell dramatically while Hong Kong stocks performed better. The main theme of the transactions was then inflation, but great changes have taken place since Russian-Ukrainian conflict. The major European markets have risen back to their pre-war positions. We believe that there is a high probability of returning to the original rhythm in the near future.

From a longer-term perspective, facing unprecedented changes, we have always been looking at the parts and details as the broad landscapes remain stable or change very slowly. But now the big picture is no longer the same.

The monetary system is relatively stable, so that possible changes are normally ignored in the dimension of a person’s life. US dollar represents the fundamental interests of the United States. The status of US dollar is a matter of a hundred years but may be regarded as eternal within the scope of a person’s life-time experience, which is not true. The strength and the desire of a country often do not match, plus the growth of strength among countries is uneven, so conflicts and changes are inevitable. In terms of China’s energy system, most of the coal is supplied domestically and is cheaper than oil or natural gas. In the short run, increase in coal supply can stabilize the advantage in energy. In the long run, China has strengths in wind power and photovoltaics. Therefore, China maintains relative advantages. Speaking of inflation, as a major manufacturing power, China is basically self-sufficient in food and relies on coal for energy, so the pressure is not significant. The financial risks are also limited, because the stock market valuations are low and the property risks are gradually easing, thanks to the deleveraging and risk control in the previous years. In addition, China has 3 trillion US dollars foreign exchange reserves and the most restrained monetary and fiscal policies among the major economies. On top of that, possible legacies of the recent market volatility would be a smoother multi-departmental collaboration and a stressed policy goal to reduce the negative impact on the economy of a largely volatile capital market.

After the short-term shocks, we believe that the market will return to normal that the outlook and valuations will re-reflect a long-term profit. Although spectacular opportunities are hardly in sight, there are still many bottom-up options.