Market review
The performance of the domestic market is generally in line with expectations. Under the guideline of ‘anti-epidemic first and economy the second’, economic policies mainly play the role of support rather than pushing, and the occurrence of local epidemics has put more pressure on the already weak recovery.
In overseas markets, we have made two judgments previously: First, the Fed will continue tightening to consolidate the results of anti-inflation. The downward pressure on valuation is not large, but it has not reached an upward inflection point. Therefore, the core driving force of future stock prices will shift from valuation to fundamentals. Second, under the same macro, different companies show different resilience. Among them, the judgment on inflation and valuation is in line with reality in direction, but the magnitude and rhythm exceed expectations. The stickiness of U.S. inflation is strong and slow to fall, causing the Fed to tighten faster than expected, and the Fed raised the rate hike endpoint at the September meeting, which caused several risk events (such as UK pensions, Credit Suisse incident, etc.), making the 10-year U.S. bond interest rate once soared to 4% (beyond the range of 2.5-3.5% that we judged). Above factors that exceed expectations have led to the trend of US stocks rising first and then falling in the third quarter and causing great volatility.
Outlook & Investment Ideas
Domestic
Focus on the October conference. If the central government continues the previous policy, epidemic prevention first and economy second, then we will maintain the previous judgment of weak economic recovery, and actively look for undervalued structural opportunities, especially investment opportunities in the Internet field and service industry. In terms of electric vehicles, if we can find companies that meet our investment criteria, we are also willing to participate (for the time being, the expectations are still too high).
1) Platform economy, from scale-oriented to profit-oriented
Under the circumstance that both international development and domestic growth space are limited, the goal of Internet companies has shifted from "pursuing scale and market share" to "pursuing efficiency". After reducing investment, focusing on the main business, strengthening capital utilization efficiency, and improving operational efficiency, Internet companies generally showed better-than-expected profitability or loss reduction, and individual companies increased dividends or repurchases when investment demand decreased.
The delisting risk issue of China Concept Stocks has made some progress, and new achievements are expected in the fourth quarter. Although the future is still uncertain, it is much better than the worst case.
After the impact of platform governance, the delisting storm of China Concept Stocks, and the impact of the epidemic, the valuation of Internet companies have fallen sharply. At present, it is possible to select some companies with good investment opportunities: the competitiveness has not been weakened but strengthened, there is still enough room for growth in the future, and the business model has already demonstrated strong profitability.
2) Property management: Affected by the epidemic and real estate in the short term, but the attractiveness in the medium and long term remains unchanged
The impact of the epidemic and real estate on property management has begun to manifest, including the impact on the growth of the area and value-added businesses, as well as the influence on profitability and cash flow. However, the business model of property management determined that it is essentially different from the incremental demand, asset-heavy, and high leverage of real estate development. In contrast, property management is a long-term business that focuses on stock management, asset-light, high ROIC, and low leverage. Although the short-term growth of the business is affected, the independence toward the relative real estate development business has also been questioned, but most of the expectations have been included in the stock price. In the medium and long term, once the relevant companies have verified the business independence, competitiveness, and sustainability of growth, there are still great investment opportunities.
overseas
We maintain the previous judgment, believing that fundamentals are the core driver of future stock prices, and the overall market valuation level is fluctuating between the "top and bottom". The current benchmark scenario is that the U.S. enters a weak recession next year, but an economic slowdown/recession has significantly different impacts on different companies. Our goal is to identify companies with strong competitiveness, sustainable growth, and less sensitivity to recession or sufficient valuation downgrades.
1) Still believe that inflation is probability peaking and starting to fall, but the rhythm and magnitude are difficult to predict.
Although there are structural factors that may cause the medium- and long-term inflation to be higher than in the past, including the global supply chain restructuring from "efficiency priority" to "safety priority", and deglobalization caused by the competition and conflicts of interest between countries. But there are also other structural factors to reduce inflation, such as alleviating labor shortages by improving labor efficiency/replacement of humans (including cloud computing, robots, etc.). In the short and medium term, inflation in the United States will be eased: 1) The high inventories of global finished goods will lead to a decline in demand and bring about deflationary forces in the near future; 2) Rents have begun to peak and fall, which had led to high inflation previously; 3) Unemployment is still at historically low levels, but as the service sector has now returned to its long-term trend line, which is labor-intensive and the latest to recover, while the labor market in other industries has cooled down, it probably means that the most labor-shortage moment has passed.
2) Regarding interest rates and valuations, the main stage of systematic devaluation has likely passed, and the key is the fundamentals in the future
Considering factors such as population and productivity, it is difficult for the potential growth rate of the U.S. economy to exceed the level of about 2% since 2010. If inflation is believed to fall back to the level of 2-3% in the future, the long-term interest rate that affects the valuation should be at 3-4%. According to the Fed's goal, the benchmark interest rate will reach as high as 4.6% next year, the long-term target interest rate is 2.5%, and inflation will fall to 2%, so the interest rate of 10-year US bond should not exceed 3%. If liquidity risk is not triggered, the current valuation has already factored in the expectation of interest rate hikes. So the core driving force for stock prices in the future will shift from valuation to fundamentals.
3) Under the same macro, different companies show different resilience
Structural differentiation can never be overemphasized.
Confronting the economic slowdown, the fundamentals of US stocks are obviously differentiated. For example, the overall growth rate of sporting goods is slowing down, the inventory pressure is increasing, and there are more product promotions. However, the earnings report of the athleisure brand leader demonstrated all-around toughness, including domestic and international growth rates, different categories growth rates, customer flow and sales growth, product price resilience, and great inventory levels, neither was affected by the whole industry. Another example is a representative company in the field of travel booking platforms. In the face of high inflation and the expected slowdown in future demand, it still provided a growth outlook that was stronger than its peers and showed profitability that exceeded expectations.
Hong Kong stocks: still too undervalued, maintain a bullish view. Our views on Hong Kong stocks remain unchanged. As an offshore market, Hong Kong is easily affected by various factors and is more volatile. However, the companies we invest in are all Chinese companies with historically low valuations. They are also significantly undervalued even in the global view. At present, they are the most attractive investment opportunities.
U.S. stocks: the maximum valuation disturbance has passed. We can find many companies with strong competitive advantages and global expansion opportunities. After taking the macro disturbances into account, there are still a few companies with strong fundamentals and reasonable valuations.
A shares: under the same stock selection criteria, there are relatively fewer opportunities.
The main directions currently focusing on:
Investment opportunities in overseas cloud computing. Optimistic about the segments serving medium and large enterprise customers and having a good competitive landscape, which are the rigid demand that is least susceptible to macro impacts.
The structural growth opportunities of semiconductors. We are mainly optimistic about the semiconductor opportunities related to advanced manufacturing processes, and the short-term economic impact provides a good buying opportunity.
Investment opportunities for overseas travel platforms in the post-epidemic era.
Domestic service industries: investment opportunities that have long-term growth but are seriously undervalued such as property management.
Consumption: investment opportunities of segment leaders that fit the generational trend of consumption, solve the underlying needs of consumers, and have the potential to increase market share and grow quickly;
Electric vehicles: optimistic about segments/companies that can build sustainable competitive advantages.
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