Newsletter commentary Sep 2025

From “Uninvestable” to “Indispensable”

The market maintained its momentum throughout September. Shares linked to gold and silver exhibited notable strength, tracking the sharp upswing in precious metal prices. Copper, meanwhile, continued to benefit from supply-side disruptions, bolstering market confidence in the price stability of the metal. Energy storage companies also stood out with robust performance. In contrast, high-dividend sectors such as banking and non-bank financials underperformed, likely due to shifting capital flows.

China’s domestic AI industry chain demonstrated particularly strong momentum. Advancements are emerging across multiple segments—including chips and computing clusters—reflecting rapid progress in the ecosystem’s maturity. Integrated optimization efforts are now effectively compensating for weaker individual links, greatly facilitating scalable production. Overseas, AI-related supply chains have begun incorporating supply-chain finance, while accelerating the expansion of downstream applications and corresponding revenue streams has become an increasingly urgent priority.

A steadily climbing market inevitably attracts greater interest. Domestic investors are likely reassessing their portfolios, weighing allocations across key asset classes—savings, bonds, real estate, and equities. The multi-year bull run in long-term bonds appears to have reached an inflection point; if not a conclusive end, then certainly a phase of significant adjustment—making it unlikely for long-bond yields to revisit recent lows in the near term. Meanwhile, property values continue to face downward pressure and will need time to stabilize. With deposit rates lingering just above 1%, their appeal has diminished significantly, particularly as dividend yields from equities have consistently outperformed them—a reality underscored by the ongoing market strength.

The once-prevalent narrative of China’s economy undergoing “Japanization” has largely lost credibility. In its place, a new story is taking shape—one that emphasizes China’s persistent drive for innovation and its distinctive position as the only major economy with a comprehensively built-up industrial and manufacturing base. This foundation not only generates a steady stream of new investment opportunities but also reinforces the economy’s resilience, enabling it to sustain dynamism throughout ongoing industrial upgrading and transformation.

For global investors, the past few years have amounted to nothing less than a paradigm shift—if not a wholesale transformation of their worldview, then certainly a profound reassessment of risks and opportunities. The dimming of former economic “beacons” has triggered not only widespread capital repatriation but also a strategic reallocation of portfolios in search of new sources of growth. Within this recalibration, China’s economy and markets stand out for their relative stability and predictability—qualities that are increasingly positioning the country as a compelling destination for diversification.

China's burgeoning innovative prowess is becoming increasingly apparent. The artificial intelligence sector serves as a case in point: Chinese innovators have developed competitive models with significantly fewer resources than their American counterparts. Furthermore, in addressing shared global challenges, particularly the pursuit of carbon neutrality, China has achieved world-leading outcomes in both industrial advancement and emission reduction efforts.

At the same time, we believe concerns over deflation in China are beginning to recede. By contrast, several developed economies now face severe fiscal sustainability challenges triggered by inflation. Many are under mounting pressure to cut public spending, yet few have managed to do so in practice. High inflation has already significantly eroded household purchasing power, rendering further fiscal tightening politically untenable. This has, in turn, led to frequent leadership changes in many of these countries. In a sense, parts of the developed world are exhibiting traits more commonly associated with emerging economies—a shift that introduces considerable uncertainty for global investors.

Meanwhile, China’s ongoing initiatives to curb excessive competition, often referred to as “anti-involution” measures, are gradually rationalizing medium- to long-term supply expectations across a range of industries. While reduced supply may dampen investment enthusiasm and create near-term price pressures in certain sectors, we see these policies fostering healthier supply-demand balances over time. From a long-term discounted perspective, such structural improvements carry substantial value-creation potential.

Another perennial concern among global investors, the renminbi, is also shifting from a perceived risk to a potential advantage. We consider the currency meaningfully undervalued on a purchasing power parity basis. As China continues to integrate into the global economic architecture, this discrepancy is likely to narrow. The renminbi already affords access to nearly all categories of goods and services, often at highly competitive global prices. More importantly, the breadth and value of what it can purchase point to considerable appreciation potential in the years ahead.

So, are Chinese equities expensive today? Not particularly. The current market environment differs markedly from the 2014–2015 period, when valuations were largely disconnected from fundamentals, and also from the 2019–2020 phase, when blue-chip stocks were priced based on overly optimistic long-term assumptions. By comparison, today’s valuations appear far more restrained.

While certain sectors or individual companies may face near-term risks, especially where high growth expectations are extrapolated linearly, and small-cap stocks, though limited in aggregate market weight, often trade at elevated multiples, the broader market remains reasonably valued. Many large-cap companies have experienced meaningful valuation expansion, yet their pricing continues to reflect rational expectations rather than euphoria. On a global scale, a growing number of these firms have evolved into truly international competitors—and many remain relatively undervalued compared to their peers.

Of course, challenges persist. Both consumption and property markets remain subdued. As consumption-related subsidies are gradually phased out, additional pressures may arise, necessitating ongoing policy support and adjustments in these areas. That said, the relative stability of these traditional sectors is helping create valuable space for emerging industries to flourish—something that remains worth anticipating.