Monthly Investment Report -202301

Market review: Overseas inflation fell as expected, the Federal Reserve’s interest rate hike slowed down as expected, and domestic economic activities recovered noticeably after the epidemic

In the US, inflation has declined as expected this year, with economic indicators showing further slowing. The Fed's interest rate hikes have slowed to 25 basis points for two consecutive cuts, as expected, with a statement indicating that it will pause after a few more hikes. The market has moved ahead of the Fed, with the 2-year Treasury bond yield falling from its previous high of 4.72% to 4.09%, reflecting the market's view that the Fed's interest rate hikes will not reach 5% and will begin to cut rates this year. The 10-year Treasury bond yield has also fallen from its previous high of 4.25% to its current 3.4%, driving a general increase in market valuation levels.

Domestic post-pandemic economic activity has noticeably recovered. But considering the impacts of the pandemic spread and the Spring Festival in January, the potential for recovery remains to be verified. However, leading indicators show that the repair of consumer demand has not yet ended, real estate sales are beginning to rebound, and the second-hand housing market has shown signs of improvement, but new housing has not yet started.

Outlook & Investment Ideas

We maintain the previous judgment. The domestic market depends on the economic recovery brought about by "steady growth and increasing confidence", especially in the real estate and consumer sectors. Currently, there are still doubts in the market regarding the recovery of the real estate sector, and it is widely believed that new home sales will continue to decline. However, we believe there is a significant expectation gap. Since the outbreak of the pandemic, Chinese residents have accumulated nearly 4 trillion RMB in excess savings. With falling housing prices, lower down payment ratios, and historically low mortgage rates, residents' ability to purchase homes is actually increasing. If confidence can be restored, real estate consumption and investment are more likely to outperform market expectations, which is the most important task of China's economic policies this year. In terms of consumption, the industry has experienced supply shortages and increased concentration during the pandemic. Areas related to investment and business activities with greater demand elasticity are expected to have greater potential for improvement and longer sustainability.

In terms of overseas markets, the overall market valuation has shifted from "killing valuation" to "valuation recovery" in 2022, and this process is expected to continue with further potential for valuation improvement. Despite the economic recession, recent Q4 earnings reports in the US stock market suggest that although Q4 earnings have generally weakened, the market has already priced in the earnings downgrades. Looking ahead to 2023, the bottom of many sectors is becoming clearer, and there are signs that the timing and extent of the market bottom are better than expected. For example, despite previous concerns that TSM's new advanced process products would not succeed in raising prices and old products would be discounted, most customers have accepted the new product pricing, and gross margins are better than expected. In addition, tech companies have started to control their 2023 capex and operating costs, and the cost control effect is showing signs of exceeding expectations. With the market having already priced in earnings downgrades, as long as the subsequent economic recession is controllable, earnings forecasts are more likely to be revised upward. Against the backdrop of valuation recovery and short-term earnings forecast improvement, companies with strong competitiveness and sustainable growth capabilities will benefit the most.

Hong Kong stocks: relatively most undervalued. The service industry in Hong Kong market is still the most promising sector.

Chinese concept stocks: the risk of delisting has temporarily eased, and the regulation of the platform economy has also shifted from strict to support and encouragement for development. They also benefit from the domestic economic recovery. We are actively looking for opportunities.

US stocks: the period of greatest valuation disruption has passed, and the impact of the recession is better than expected. The recession is also temporary and will change as the interest rate cycle shifts. There are many investment opportunities that have strong competitive advantages, global expansion capabilities, reasonable or even undervalued pricing, and resilient fundamentals or have already priced in pessimistic expectations even after considering macro disruptions.

A shares: Under the same selection criteria, the overall valuation of A shares is below the historical average but not as cheap as Hong Kong stocks. They will also benefit from economic recovery. We will actively seek investment opportunities.

The main directions currently focusing on:

1. Investment opportunities in overseas cloud computing. We are optimistic about the companies serving medium and large enterprise customers in subdivided fields with good competition dynamics. They are rigid demands that are least susceptible to macro influence;

2. The structural growth opportunities of semiconductors. We are mainly optimistic about opportunities related to advanced nodes, and the short-term cyclic impact provides a good buying opportunity;

3. The investment opportunities of overseas travel and service platforms in the post-epidemic era;

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

5. The domestic service industry, represented by property services and vocational education that have long-term growth and were seriously undervalued;

6. Internet platform companies with great growth potential and reasonable valuations;

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 is irrelevant to the macroeconomy, and will benefit from competition between major powers in the future. The 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 opportunities that meet our criteria.