Market Review
Domestic
The nationwide spread of the epidemic since July and the turmoil of property loan suspension interrupted the original recovery rhythm
Since July, the epidemic has intermittently spread across the country. Under the current situation that the general policy of clearing has not changed, the epidemic prevention and control will have a continuous negative impact on the economic recovery. Even if the overall situation is under control, the recovery would become weaker and take a longer time.
On the other hand, the loan suspension crisis that occurred in July was unexpected. As the first priority of the government, banks, and real estate companies, with the high-level guidance of "saving the project but not the enterprise", guaranteeing the handover of buildings will have certain tightening effects on the real estate companies in the short-term, making the original recovery path of "Sales recovery - real estate enterprises liquidity improvement - balance sheet repair - investment " being interrupted.
The Politburo meeting sets the tone for economic development in the second half of the year: Calculate the "political account", support the economy bottom but not lift
At the end of the month, the Politburo meeting set the tone for the government's working plan for the second half of the year. In general, it is to support but not lift, so our expectations for the economic recovery in the second half of the year should not be too high. On the one hand, the meeting pointed out that the general tone remains changed, the epidemic prevention and control is still the first priority, and it is proposed to calculate the "political account". On the other hand, the formulation of the overall economic goals has become "keeping the economy in a reasonable range and striving to achieve the best results". Therefore, there will be no stimulus to ensure economic growth. Finally, concerning real estate, it is proposed to "stabilize the real estate market" and put it in front of "housing and not speculating", which reflects the bottom-line thinking. The guideline is to support but not lift both for real estate and for the overall economy.
Our current judgment is that the domestic economic recovery is still the main direction, but under the situation of the clearing-zero policy, local financial pressure, and the central government's emphasis on no strong stimulus, the domestic economy may be in a relatively sluggish state for a long time. The general strategy of domestic investment remains to focus on the industries and companies that have a long runway but are currently severely undervalued due to various reasons.
overseas
Inflation peaked and valuation downward pressure eased
Although it is hard to tell how fast inflation will fall, it is likely to have peaked. With the economy showing signs of slowing down, the Fed's tightening expectations have not gone further. The market used to be ahead of the Fed's interest rate hike, the 10-year treasury bond once soared to nearly 3.5%, but has now fallen back to around 2.7%. For the overall market valuation, the further downward pressure has been significantly eased, and the follow-up will depend more on fundamentals, especially whether the corporate earnings forecasts will be revised downward if the U.S. enters a recession next year.
Recent US stocks earning reports show divergence in fundamentals
Even in the technology field of US stocks, different sub-sectors and different companies in the same industry show great differentiation, and the economic slowdown/recession has different impacts on the fundamentals of companies. For example, in the field of cloud computing, the companies serving medium and large enterprises with good competitive landscapes showed strong resilience, represented by Microsoft and ServiceNow. In the field of smartphones, with negative industry growth, Shanghai lockdown, and headwinds in exchange rates, Apple bucked the trend and increased its share. It achieved positive growth in Q2, and the guidance for Q3 was to accelerate. E-commerce is one of the industries where demand was overdrawn the most due to the stimulus of fiscal subsidies in the epidemic, and it is one the earliest to slow down. However, Amazon’s Q2 performance is better than expected, and it gave the guidance to speed up in the next quarter.
Of course, we have also seen many companies perform significantly lower than expected, and under the previous situation of valuation overdraft, it is still difficult to take them into our investment scope even after a significant decline.
Therefore, our main strategy for overseas investment is to select individual stocks carefully using the principle of long-term competitiveness and growth under the current valuation that is more reasonable than before.
Outlook & Investment Ideas
Domestic: the worst phase of the economy has passed, but the recovery is likely to be weak
The negative impact of epidemic prevention and control on economic activities has been greatly reduced after the improvement of epidemic prevention methods. However, since epidemic prevention is still the first priority of the government work in the second half of the year, while the economy is the second, and there is no plan of stimulation to ensure growth, even the approach to solve the current tricky real estate issues is to support but not lift, so it is more important to actively look for structural investment opportunities.
Overseas: actively seek companies with reasonable valuations, strong competitiveness, sustainable growth and are relatively insensitive to economic downturns or have sufficient earnings downgrades
The probability of unexpected tightening is significantly reduced under the circumstance of peaking inflation and an obvious economic slowdown. Currently, the overall market valuation is pretty low, and the pressure of further downward is not significant. The follow-up key point is to focus on fundamentals and find good companies. In particular, economic slowdowns/recessions have apparently different impacts on different companies. Our goal is to find companies that are highly competitive, have sustained growth, and are relatively insensitive to economic downturns or have sufficient earnings downgrades.
Hong Kong stocks: still too undervalued, maintain a bullish view
The view on Hong Kong stocks is unchanged. As an offshore market, Hong Kong is susceptible to greater volatility due to various factors. But the companies we invested in are all Chinese companies with valuations below historical averages and are significantly undervalued even in a global view, making them the most attractive opportunities at present. But in terms of investments, we will take the risk of the offshore market into account in our valuation framework.
US stocks: Despite the recently increasing macro disturbances, U.S. stocks have better corporate governance, and we can find many opportunities with strong competitive advantages and the ability to expand globally. There are a few companies with strong fundamental resilience and reasonable valuations after taking macro disturbances into account.
Several main directions we are currently focusing on:
Investment opportunities in overseas cloud computing, bullish on the segments serving medium and large enterprise customers and with a good competitive landscape.
Structural growth opportunities in semiconductors, primarily bullish on advanced semiconductors.
Structural growth opportunities in the financial payment field, mainly optimistic about monopoly companies with strong network effects
Investment opportunities in travel service platforms under overseas Reopen.
Domestic service industries, investment opportunities that have long-term growth but are seriously undervalued such as property management.
Other directions including EV and consumption are still being explored, and we will be happy to include those that meet our criteria.
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