Monthly Investment Report -202212

Market review

In the domestic market, it was previously mentioned that only the policies in macro leverage and adjustments in epidemic control can bring significant changes to economic growth in the short term. Both of them began to appear in November, and the rhythm was earlier than the original judgment of Q1 next year. First, in the aspect of the macroeconomy, the change is mainly reflected in the adjustment of real estate policies. In the past, the main measures taken by decision-makers to deal with the real estate crisis were "rescue projects but not enterprises", which has changed to “rescue the high-quality enterprises” now. The government has issued 16 financial measures, succeeded by the second and the third arrow, trying to help real estate companies restore credit and liquidity through bank credit support, private enterprise bond financing support, equity financing liberalization, etc. Therefore, it is highly possible that the real estate crisis is over, and the real estate industry is expected to see a significant repair. The second is the adjustment of the epidemic prevention policy, changing from the previous strict dynamic clearing to the optimized control, gradually establishing a universal immune barrier and moving towards liberalization. Some areas have begun to quarantine at home instead of in centralized cabin hospitals. The effects of epidemic prevention on the economy are expected to be eliminated quickly.

In overseas markets, not only do some leading indicators of inflation continue to fall, indicating that inflation will peak, but the Federal Reserve also stated that it will slow down interest rate hikes. It is expected to see the highest interest rate in the first half of next year. The Fed’s target interest rate is around 5%, but the following interest hikes are not likely to have an impact on the valuation. Instead, it is expected that the valuation will increase with the slowdown of interest rate hikes and the fall of treasury bond interest rates. Fundamentals are the core variables that affect stock prices in the future. The macro recession will have various impacts on different industries and companies, so the fundamentals will differentiate. Judging from the tracking data and financial reports disclosed in November, the destocking of CPUs and GPUs in the semiconductor industry has come to an end. If there is only a weak recession next year, while digital intelligence is still far from over, combined with the new product launch, the downturn of the cycle is expected to end, and it will resume growth next year. The hotel industry continued to recover in Q3, and most of the companies have returned to the pre-epidemic level. Although the industry faces the risk of slower growth next year brought about by the macroeconomic slowdown, alternative accommodation is expected to be more resilient than the industry since it benefits from structural changes. Another example is the SaaS field, some companies experienced a sharp slowdown in revenue, while others showed steady growth and profitability, reflecting the differences in customer quality and the importance of their solutions.

3. Outlook & Investment Ideas

1. Domestic

Although it is not optimistic in the long run: the global landscape is restructuring, and all the countries are shifting from efficiency-oriented to safety-oriented, making Chinese manufacturing face the risk of losing share globally. China is also more concerned about safety, resulting in economic construction no longer the unique goal and the change of resource allocation mechanism, which increases the difficulty of long-term investment and value investment. But in the next 1-2 years, due to the previous drag of real estate and the impact of epidemic prevention on the economy, future policy adjustments will be sufficient to bring about significant positive changes at the margin. Therefore, we are more optimistic in the short term, especially in the extremely underestimated Hong Kong market, where some growth companies in the service industry were mistakenly taken as "bankrupt" companies. The valuation restoration of these companies has not yet finished, and as the real estate industry has come out of the trough and the epidemic prevention is gradually liberalized, the fundamentals will be recognized or even raised, and the valuation is expected to return to normal levels.

2. Overseas

We maintain the previous judgment that the downward trend of valuation is likely to end, and it is even possible that the valuation will raise. Fundamentals are the core driver of future stock prices. The current baseline situation is that the United States will enter a weak recession next year, and the economic slowdown/recession will have different impacts on different companies. Our goal is to find companies that are highly competitive, have sustainable growth, and are relatively insensitive to economic recession or the earnings have been sufficiently downgraded.

1) Inflation has probably peaked and fallen back, but the rhythm and magnitude of the fall are still difficult to judge, and the probability of a rapid fall is not low

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 and destocking are the factors that bring about deflationary forces in the near future; 2) The house rents and used-car pricing have begun to peak and fall, which were the key factors that 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) The systematic depreciation of valuation has passed, and the valuation may increase in the future with the decline of national bond interest rates. The key driver of stock prices is the fundamentals

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 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 5% 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. Since the change in the interest rate of treasury bonds is ahead of the Fed’s adjustment, the interest rate of treasury bonds is expected to continue to decline in the future, resulting in an increase in valuation. If there is no need to worry about valuation depreciation in the future, then the core driver of stock prices will shift from valuations to fundamentals.

3) Under the same macro environment, different companies show different resilience

Structural differentiation can never be overemphasized.

Confronting the economic slowdown, the fundamentals of US stocks are apparently 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 financial report of the athleisure brand leader demonstrated strong resilience that was not affected by the whole industry. Another example is the consumer chips, which was affected by the demand reduction and inventory adjustment, but now the inventory correction is coming to an end, and the change in the industry's competitive landscape may enable some companies to take the lead in getting out of the bottom. In the tourism and hotel industry, under the same recovery situation, some companies have already surpassed the pre-epidemic level, while other companies have just returned to the pre-epidemic trend line.

Hong Kong stocks: still 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, making it looks very terrifying when it is falling, but it also rises rapidly. The core of our investment is to fully understand the company and the level of the pricing. On top of that, we try to consider as many factors as possible to "follow the trend", including prosperity and expectation differences. At present, Hong Kong's service industry is still the most promising field.

China Concept Stocks: It is also an area with a large enough decline. As the delisting risk of China concept stocks has been alleviated temporarily, and the platform regulation has come to an end, we believe there are more opportunities and will actively look for them.

U.S. stocks: The biggest valuation disturbance has passed. There are 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, but more research efforts will be made in the areas that meet the national development direction.

The main directions currently focusing on:

1. 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.

2. The structural growth opportunities of semiconductors. We are mainly optimistic about the semiconductor opportunities related to advanced manufacturing processes. The short-term economic impact provides a good buying opportunity.

3. Investment opportunities for overseas travel platforms in the post-epidemic era.

4. Structural growth opportunities in the field of financial payments. We are mainly optimistic about the monopoly companies with strong network effects.

5. Domestic service industries: investment opportunities that have long-term growth but are seriously undervalued such as property management and vocational education.

6. Internet platform companies with great growth potential and reasonable valuation.

7. Branded consumption companies with good development prospects and reasonable valuations.

8. New energy vehicles: optimistic about segments/companies that can build sustainable competitive advantages.

9. National defense: the industry demand has nothing to do with the macro-economy, and will benefit from competition between major powers in the future. A low correlation with other investments can reduce the volatility of our portfolio.

10. U.S. Treasury bonds: will benefit from the future decline in inflation and the normalization of interest rates. It is a low-risk asset that is better than cash and different from stocks.

We will be happy to include other directions that meet our criteria.