Newsletter commentary Nov 2019

The net position of our portfolio hasn’t changed much in November. We maintained a proactive investing approach. Equity market declined during the month, mainly due to the valuation factor, not change to future earning expectations, in our view.

2019 is almost over. Looking back, the market has been pessimistic most of the time, due to the concerns of macro economy and trade war issues. However, the asset management industry, such as mutual funds, has done pretty well in the past year. On one hand global central banks have been market friendly. On the other hand property sector has been a supporting factor in the economy. The resilience of overall economy has exceeded expectations. Moreover, those quality companies have delivered stable earnings. Although external environment has been hostile, the market adapted itself and moved on. 

Looking ahead, we believe the pressure on the macro economy will continue. The counter cyclical policies have been given more priority. Historically, the effectiveness of such policies have depended more on the willingness of the policy makers rather than on their capability. On this particular point, we have discussed many times before, and we still maintain such view. Domestically we might see more downward pressure from property sector next year. But counter cyclical policies since August has worked their way through gradually. Currently the industrial sector has pretty low inventory and solid balance sheet. We will also gradually see the benefits of tax cuts. As long as the market has stable expectations, economy is likely going to continue its resilience. 

That being said, the current constraints are that good quality companies are more expensive compared to last year. This would reduce our potential return. However, we expect the number of good quality companies to increase. There are a number of areas that will have big changes and opportunities. 

To begin with, as the economy stabilizes many good Chinese manufacturing companies have established strong market positions and enjoyed healthy balance sheets. Such companies will have good revaluation opportunities. 

What's more, we have witnessed the substantial productivity gain in the 2C sector. Going forward, there will be similar opportunities in the 2B and 2G sectors. Coupled with the tech infrastructure improvement such as 5G, we think such opportunities will become realities in the next few years. China has good chance becoming a global leader in this area. 

Further, Chinese technology sector has improved at a faster pace than last year. We have observed such change in the tech supply chain. 

In addition, while there is less user dividend for the internet companies, they are showing strong earning power. They are also investing heavily in the future. 

Besides, although the consumption growth has slowed, the spending for “better self” has increased substantially. There are also more home grown brands. 

Last but not least, financial service industry has developed. Traditional lending model has transformed to the wealth management model. Such transition has brought big opportunities. China is the global leader in fintech usage. Good companies have substantial growth opportunities. 

We have a strong feeling that a domestic homogeneous market is forming at an accelerating pace. It is partly driven by the fact that the internet applications and service have penetrated further into low tier cities, making distribution channels more transparent and available to consumers there. It is also partly driven by the national reimbursement negotiations and “4+7” bulk purchasing system in the pharmaceutical industry. And last but not least it is driven by the change of the consumption tax system. Against such backdrop, there will be more efficiency gains in the economy. 

2019 has been a good year for equity market, and we believe equity as an asset class will continue to show its value in the coming year with a rational return expectation.