Newsletter commentary June 2025

A New Chapter in Consumption: Beyond Functionality and Going Global

In June, there was a war involving Israel, Iran, and U.S. Soon after, all parties declared victory, and the conflict temporarily ended. In May, there were clashes between India and Pakistan. The world is far from peaceful, but it seems that no one has the ability or willingness to engage in long-term conflicts, as conflicts are extremely costly.

Most markets experienced a broad consolidation after recovering from April’s tariff shocks. Europe ended roughly flat, China saw a modest gain, and the U.S. market outperformed slightly thanks to a renewed AI-driven narrative and growing expectations of an earlier rate cut. South Korea surged significantly on market- and economy-friendly policies introduced by the new president.

China’s economy performed well in the first half of the year. Real estate benefited from a wave of new supportive policies. Despite tariff concerns, the first half was marked by a rush to export. More importantly, fiscal spending has been front-loaded and more balanced compared to previous years, and both national and local subsidies have meaningfully supported consumption growth.

Looking ahead, early signs of fatigue in the real estate market are beginning to emerge. The base effect from September onwards will be less favorable. The front-loaded export push will likely taper off, and the impact of stimulus programs like trade-ins may diminish over time. U.S. and global tariff negotiations remain unresolved, contributing to significant uncertainty. Overall, the second half is expected to be more challenging, although the tone of fiscal policy will likely remain stable. Still, the base for comparison in the second half will be higher. The U.S. is also showing signs of weakness beyond soft economic data.

Some concerns are being alleviated by the implementation of earlier policies—such as policy-based financial instruments and real estate inventory buyback programs. Additional reserve policies may be gradually rolled out. Short-term economic targets are unlikely to change significantly. Meanwhile, planning for the 15th Five-Year Plan will help guide China’s medium-term trajectory in a positive direction, emphasizing improved public welfare, enhanced technological upgrading, and a more robust international strategy.The U.S. Fed’s dot plot shows growing internal divergence, with a higher probability of an earlier rate cut. However, concerns remain about the inflationary impact of tariffs. June’s data will be crucial.

China’s economy will face some pressure in the second half of the year. However, concerns from traditional perspectives—such as the real estate sector—have been significantly alleviated. For example, despite transaction volumes being halved in a short period and prices dropping nearly 30%, the broader economy has not seen more serious problems. Compared to five years ago, many rapidly growing sectors have emerged to offset the drag from real estate. These include semiconductors, new energy and smart electric vehicles, innovative pharmaceuticals, and artificial intelligence.

These sectors are far more capital- and talent-intensive than real estate. As a result, their contribution to GDP comes with less employment absorption, leading to a paradox: surging electricity consumption alongside persistent employment pressure. In fact, this is not contradictory—it simply reflects a sharp transformation in the industrial structure that defies conventional wisdom.

Few economies have been able to undergo such a shift within five years. For instance, China’s pharmaceutical industry has gone from importing intellectual property to exporting it at scale. In new energy, China has built a globally dominant position, technically far ahead of global peers, possibly achieving carbon peaking earlier than the original 2030 target—despite rapid growth in electricity usage. In EVs, domestic brands first disrupted traditional car sales at home and are now winning over global consumers. In semiconductors, China has turned external pressure into momentum, becoming the top exporter in the category.

From an investor’s perspective, China’s economy—like any other major economy—faces challenges. But we continue to create new value. Given our high savings rate, large base of state-owned assets, and the central and local governments’ capacity for resource mobilization, China still has ample fiscal and policy room. Therefore, we remain confident in the long-term resilience of the Chinese economy. As we move forward year by year, what we’re seeing are not only the challenges—but also new and exciting opportunities.

At the beginning of the year, we identified four main areas of opportunity: high dividends, AI-related themes, consumption, and Chinese Company Going Global. High-dividend stocks proved to be strong investments even after a short-term pause during the early-year AI boom. They remained attractive in the first half, as long as earnings and dividend stability could be assured. AI had a blockbuster start to the year, but without major technological breakthroughs, the sector entered a consolidation phase. AI is still in the process of gradually permeating various industries, though it has not yet begun generating substantial new revenue streams. What we’re seeing now is more capital expenditure replacing operational expenditure—a trend reflected in job cuts at leading AI companies. Consumption turned out to be a pleasant surprise. While total consumption in many traditional categories was sluggish, demand for non-functional, lifestyle-driven consumption grew rapidly. More impressively, many Chinese consumer brands have achieved outstanding results globally. Whereas Chinese capital goods have long been successful internationally, now China’s consumer brands are starting to gain traction among global consumers. This is a remarkable achievement and signals a new dimension of global recognition for China—similar to what Toyota, Nintendo, or Sony once represented. This opens up much larger growth spaces for many companies. Like how global acceptance powered decades of compounding for leading consumer brands, we are now seeing similar potential in some Chinese brands. For example, several Chinese beverage brands in Southeast Asia today are starting to resemble Coca-Cola’s early days in China during the 1980s and 1990s—this could be the beginning of something massive. Innovative pharmaceuticals are also following this path. China has already built a complete innovation ecosystem and is now entering a phase of high-volume output. Chinese Company Going Global has been affected by tariffs, but the broader trend remains unchanged. The fact that China’s exports consistently outperformed expectations over the past few years highlights the strong competitiveness of its products, and many new products are continuing to win over overseas consumers.

In the second half of the year, the long-term story behind high-dividend strategies remains intact—though it is not a trade that plays out all at once. AI still requires further progress in mitigating model hallucinations and advancing downstream applications before it can reaccelerate meaningfully. Bottom-up opportunities in consumption and innovative pharmaceuticals will continue to emerge. As for the “Chinese Company Going Global” theme, we view it as a long-term trend that we are prepared to patiently wait for.

Additionally, the geopolitical turbulence we are seeing is likely to drive reallocations across countries and asset classes, marking a longer-term structural shift. In this context, stablecoins, compared to other cryptocurrencies, may offer more practical solutions to real-world economic problems and are more likely to gain broader consensus and adoption.

Although China’s economy faces challenges, it also possesses a wide range of policy tools, and maintaining overall stable growth remains well within reach. Against this backdrop, our primary focus remains identifying and capturing alpha opportunities. China may emerge as a major destination for global capital reallocation, which could provide an extra tailwind going forward.