Market Review: Domestic recovery is weaker than expected, overseas tightening likely coming to an end, and AI is the biggest structural opportunity.
The intensity of domestic economic recovery is weaker than expected, reflecting that the central government's unwillingness to solve economic problems through stimulus measures. On the other hand, the recovery of business and consumer confidence naturally takes longer without external force, resulting in a less noticeable repair of long-term investment by enterprises and consumer investment and consumption. The expectation of a relatively strong recovery and the actual weakness of the situation led to market fluctuations.
The sectors that significantly recovered in the first quarter were those previously greatly affected by the pandemic, including transportation, catering, tourism, and hotels. However, except for a few companies, the overall recovery strength did not exceed market expectations. The recovery in real estate sales was very strong, with a cumulative YoY growth of 5% in the sales area of new homes in 59 cities (21% in 30 cities). Since the transaction was high in H1 but low in H2 last year, as long as the current transaction level is maintained, the annual sales can have certain growth. But the conversion of sales into enterprise land acquisition and investment is still relatively weak, especially for private real estate leaders. Despite a significant easing of liquidity, the improvement in cash flow is not enough to support their restart of investment. The policies encouraging real estate demand in various regions under the backdrop of sales recovery are not stronger on the margin, and expectations of policy exits have emerged in some areas. In other industries, the situation is mostly characterized by intensified competition and damaged profitability due to the slowdown or no growth in industry.
The US economy performed better than expected in the first quarter, particularly in terms of employment and consumer data, although inflation did not fall as fast as expected. The 10-year Treasury yield once rebounded to 4.1% due to concerns about the Fed's upward revision of interest rates, but as regional bank risks exposed under high interest rates, the Fed's further tightening space was suppressed, and interest rate cuts may happen within the year. Recently, the Fed has provided liquidity to banks and expanded its assets by about $400 billion, and the 10-year Treasury yield has reacted in advance and has fallen to around 3.5%, while the two-year Treasury yield, which was 5.1% in early March, has fallen to 3.8%.
The AI industry, driven by large language models such as Open AI, is likely to be an investment opportunity on the same scale or even larger than PC, smartphones & mobile internet, and cloud computing. In the future, AI will transform various fields, involving infrastructure and applications, and will be the biggest source of alpha investment opportunities, both domestically and overseas.
Outlook & Investment Ideas
In terms of the domestic market, the major direction this year is still the economic recovery brought by "stable growth and increasing confidence," but the intensity is relatively weak. Overall, we should not be too optimistic or too pessimistic about the recovery. The slowdown or lack of growth in various industries highlights the importance of competitive advantages and landscapes. It is important to carefully identify the sustainability of growth and profitability.
Regarding overseas markets, we still believe that the tightening effect of the Fed's rate hikes and balance sheet reduction has come to an end. Considering the vulnerability of the financial system under high interest rates, the risk of further interest rate hikes is small, and there is more room for a decrease. Therefore, there is not much overall market valuation pressure, and the possibility of a "valuation boost" cannot be ruled out. Although US is experiencing a credit tightening that may affect the overall economy, the impact on different industries is differentiated. The sectors that are not dependent on leverage, having a good competitive landscape, and benefited from improving quality and efficiency show stronger resilience.
AI may be the most important source of growth opportunities this year and for a long time to come. Overall, we believe that substitution and empowerment for mid-to-high-end labor have crossed the chasm, and the long-term market opportunity is in the trillions. In this process, both AI infrastructure and applications will benefit. Currently, AI's rapid proliferation and application in various industries are faster than expected, which will bring rapid growth in related fields. On the one hand, it brings opportunities for the strong to become stronger, and on the other hand, there are opportunities to reconstruct the industry landscape. Previously, our research focused more on overseas AI leaders, but in the future, we will increase our coverage and seek investment opportunities from AI infrastructure to applications both domestically and overseas.
The main areas currently focusing on:
1. AI: This is the most significant structural growth opportunity in the future, mainly focusing on semiconductors and cloud computing for now.
2.Overseas cloud computing investment opportunities: We are optimistic about companies serving large and medium-sized enterprise customers and niche markets with good competitive landscape, which can combine with AI to enhance efficiency and increase user value.
3.Structural growth opportunities in semiconductors: mainly focusing on the opportunities related to advanced processes, and AI will accelerate industry growth.
4.Overseas travel and tourism service platforms: Investment opportunities benefiting from the increased share of personalized demands in travel and tourism.
5. Structural growth opportunities in the financial payment field: mainly focusing on monopolistic companies with strong network effects.
6.Domestic service industry: Investment opportunities with steady growth, value reevaluation, and continued dividend gains, represented by property management and vocational education.
7.Internet platform companies with good growth prospects and reasonable valuations.
8.Branded consumer goods: companies with good development prospects and reasonable valuations.
9. Electric vehicles: We are optimistic about companies that can establish long-term sustainable competitive advantages, but the short-term industry landscape deterioration has not yet ended.
10. Defense: Demand is unrelated to macroeconomics and will benefit from future great power competition, and the low correlation with other investments can reduce portfolio volatility.
11.US Treasuries: will benefit from future inflation decline and interest rate normalization, making them low-risk assets that are better than cash and different from stocks.
If there are other directions that meet our standards, we will be happy to include them as well.
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