Newsletter commentary Dec 2023

In December, excluding the last two trading days' gains, the entire month was characterized by a fragile market. Essentially, various indices were mostly declining, which was indeed puzzling. If there is something worth mentioning, it is that during the month's decline, there were instances where broad-based indices outperformed small-cap indices, which is relatively rare for this year. Towards the end of the month, there were signs that some stocks that had been consistently declining started to stabilize. Furthermore, despite the regulatory events in the online gaming sector, the market still experienced a strong rebound. There were also positive signs of capital inflows from northbound trading in the latter part of the month.

Overall, the trading year for A-shares has concluded with significant deviations from our initial expectations at the beginning of the year. The impact of international capital flows has far exceeded our projections by a considerable margin. Although the economic growth rate for this year is likely to surpass the initial forecasts, it falls short of market expectations after the market rally in the first quarter. Moreover, in comparison to the structure and conditions at the beginning of the year, exports have performed better than expected, while the real estate sector has been weaker than expected. Price indices have also been significantly weaker than anticipated. The nominal GDP growth rate is expected to deviate by more than 2 percentage points compared to the beginning of the year. Consequently, the overall sentiment regarding of the economic outlook is weak.

Looking overseas, US stocks have shown remarkable performance this year after experiencing a significant decline last year. This can be attributed to strong nominal GDP growth and significant advancements in AI technology. Despite the potential impact of higher interest rates, US stocks have performed exceptionally well. On the other hand, Chinese assets have faced the additional challenge of geopolitical influences, resulting in a significant outflow of funds.

In 2023, we have maintained a consistently positive investment view, with high portfolio exposure. Since last year, we have been cautious about the structural contradictions in A-share valuations and the conversion of supply-demand imbalances in certain industries. However, we still believe that there are many investment opportunities due to the innovation present across various industries in China. As a result, the overall stability of our portfolio has improved.

Across the entire portfolio, the main losses incurred in investments related to real estate services, semiconductors, and express delivery. We faced challenges in accurately assessing the competitive landscape and industry trends in these sectors. Therefore, it is crucial of us to continue to strengthening our analysis and understanding in these areas.

Indeed, our portfolios did not achieve positive returns this year. We underestimated the complexity of various factors, particularly the impact of international capital flows and the deep-seated association between market sentiment towards the Chinese economy and the real estate sector. This has exceeded beyond our understanding and has been perplexing at times. Specifically, the notion that if the real estate sector is struggling, it automatically means that the entire Chinese economy is also struggling has led us to confusion.

We believe that it is necessary for the Chinese economy to gradually detach itself from the real estate sector, and this process is already underway. Despite the significant decline, there have been some signs of stabilization in leading indicators related to the real estate sector. Moving forward, we will closely monitor changes in first-tier cities, the situation with second-hand housing, and the potential impact of supportive polices.

In 2024, we are looking forward to more proactive compared to this year. Based on the month-on-month increase in fiscal expenditures, we anticipate an additional expenditure of over two trillion- yuan, which would account for nearly 2% of GDP. This is expected to bring about a significant change in economic landscape.

Furthermore, as we gradually move further away from the pandemic, the lingering effects will continue to dissipate, and life will progressively return to normal. We expect to see an improvement in consumption rates as consumer confidence strengthens.

 The interest rate differential between China and the United States has shifted from a significant positive differential in the past few years to slightly negative, with a decrease of over two percentage points. The most challenging times have passed, and the exchange rate has also rebounded considerably. The outlook for next year's prices remains uncertain, but it should be better than the negative one percent or so experienced this year. Listed companies have faced pressure on their performance this year, but from the current perspective, there is hope for achieving double-digit growth next year.

We emphasis that one point where our views differ from the market is the interconnectedness between the market's weakness over the past three years and the excessively high valuations of blue-chip stocks at the beginning of 2021.  While the subsequent geopolitical factors and turning points in the real estate sector also played a role, the impact of the high valuations was underestimated. However, this issue has now been largely resolved now.

Building upon this starting point, we anticipate that next year, with the improvement of the Chinese economy, stocks will perform much better. Although, we made mistakes in our assessment for 2023, it does not diminish our optimism for 2024.

Wishing everyone a prosperous New Year in investments and a joyful life. Thank you all for your support and trust in us.