Newsletter commentary Feb 2023

Performance in February was weak, because the economic recovery was not fast enough compared to the market’s implied expectations: the rise from November to the Spring Festival, although we think this is related to this year’s Spring Festival being earlier, and the temperature after the festival is lower, also many people have not returned home for three years, and the later return to work has something to do with it. Moreover, due to an unexpected phased easing of China-US relations in February, the opportunity for easing was missed, and then the continuity of overseas capital inflows was affected.

The change in our portfolio is mainly to reduce the risk exposure of some investments that have been greatly affected by the external environment. Other investments have been replaced by domestic consumption. Our original e-commerce investment strategy to speed up consumption faced a headwind in February regarding the two main points. The first point is that the impact of US relations on overseas Chinese assets emerged as a pressure. The second point is that the market is worried about the deterioration of this sector's express delivery competition pattern.

Referring to the first point, we realize that the adverse impact of the external environment on Chinese assets, especially overseas Chinese-funded investments, will continue to exist, and we do not rule out that the pressure will increase in stages. However, China's economy will improve this year, and the economic construction environment will be very positive. In the background, it can offset part of the impact.

Regarding the second point, the difference between in-house views and the market’s view is that the express delivery pattern differs from before. The current leaders can expand their advantages further and maintain good profits because the subsequent participants are limited in increment and technology. The progress is slow, and it is all endurance. At the same time, the probability of reversing again is very low when the financial constraints are strengthened, so we are still willing to hold a good firm in this sector, which is its value is higher than that of many consumer goods companies.

From the global investment perspective, Chinese assets have proved their two significant values in the past. One is the value that the economic cycle is not synchronized with other major economies worldwide. The other is that China's capital market is the market with the highest investment density in the world. The annual equity financing IPO plus additional issuance is in the trillions of RMB per year. Such high-intensity financing capital investment ensures that new industries and innovations emerge endlessly. Therefore, factors such as valuation and economic recovery are taken into consideration. We are still willing to continue to hold some Chinese-funded overseas assets.

We continue to pay attention to the opportunities of state-owned enterprises (SOEs) such as telecommunication operators. We have seen more solid evidence that the value of state-owned enterprises has increased in two aspects. One is the transformation of incentive mechanisms- most major SOEs have been implementing and working on the tools; second, the output and profits of state-owned enterprises will become more and more a regular subject in the financial budgets of governments at all levels; this is a positive signal of change for us as small and medium investors.

Looking forward to the economic policy expectations of this year's two sessions of NPC, it is challenging to go beyond the general framework of the financial work conference at the end of last year. With interest rates already at the lowest level in the past ten years and inflation rising after overseas fiscal discipline is relaxed, budgetary and financial stimulus it's all tough because of the introduction of some industrial policies, revitalizing the economy, restoring and boosting confidence, and working and pulling together will be the atmosphere created by efforts in the coming future.

 At the same time, we must avoid going the old way, since many industries have reached their peak, the rest is to reduce the impact.

Moving to the recovery of consumption, most countries except the United States have recovered slowly from the epidemic. The money issued by the United States has not caused a trauma to income expectations, but the inflation rate remains high, driven by demand. Europe and other countries are more driven by supply. China mainly relies on economic development to restore confidence and expectations for future income. The restoration impact has been shown from the work of governments at all levels. Excess savings exist, but the proportion of savings distribution could be more balanced, as wealthy households have more savings than others. In the coming years, how to transform consumption from real estate to converting macro savings into consumption is a challenging issue. It is also a long-term driven event for the economy and investment.

Moreover, China's high savings correspond to increased investment, which is experiencing a rat race on the micro level. This rat race has two sides of the same coin with high investment and growth, and to lift the macroeconomy- in a boat race, those who row the hardest will win and continue success further. There will be innovation points in the future, particularly renewable new energy & solar energy and electric vehicles.

Our portfolio reflects the in-house views about Chinese economy for recovery. Compared with the original views in previous months: we believe that overseas demand is better than expected, and domestic demand recovery is lagging. Gauging from indicated economic data, the recovery of domestic demand should be worthwhile anticipating. After the Chinese Lunar New Year, the market is also optimistic about the recovery. The market has become more rational, which is a good sign. The certainty of recovery is confirmed domestically, and the uncertainty comes from overseas. In terms of the two main uncertainties, they included the geopolitical risk between China and U.S., and another one is lingering inflation remaining for a while.