Operational Review: Adjusting the structure of technology holdings, increasing investment in consumer and financial technology sectors
In the first quarter, we maintained a heavy allocation in technology, but adjusted the structure. We reduced holdings in AI hardware that had seen significant increases, where market expectations were fully reflected, and the subsequent profit space was limited. We believe that if we look at AI hardware and applications based on the same assumptions and framework, those with similarly strong competitive advantages, high certainty, such as some leading chip foundries and design tools, as well as AI's B2B applications, have greater profit space. It's just that the realization of fundamentals is relatively late, requiring patience. Additionally, we increased our investment in consumer and financial technology sectors. After significant reduction in concerns about a hard landing at the macro level, we found many structural opportunities in these areas from the bottom up.
Currently, investments in AI account for about 35%, mainly in B2B applications, chip manufacturing, and design tool leaders. Other focuses include cloud computing, the internet, and consumer goods. The proportion of overseas assets is about 80%.
Looking back at the performance in the first quarter, our main sources of profit were firstly from the consumer sector, followed by financial technology and the semiconductor industry chain.
Market Review: US Economic Resilience Exceeds Expectations, Cooling Interest Rate Cut Expectations, Multiple Structural Highlights
Since the beginning of this year, the resilience of the US economy has further exceeded expectations, manifested in strong employment, core inflation falling slower than expected, thus continuously cooling the expectations for interest rate cuts. At the most optimistic, the expectation was for the first rate cut in March, with 6-7 cuts within the year. Now, the probability of the first rate cut in June is just over 50%, and the mainstream expectation for the number of cuts has been reduced to a maximum of 3, with no shortage of claims that there will be no cuts this year. The reasons for the economy's outperformance, as we see it, include: 1) After this cycle, per capita GDP exceeded $80,000, an increase of 26% over pre-pandemic levels, significantly enhancing human value. Coupled with good employment, lower debt burdens, and appreciating wealth, there's a strong capacity and willingness to consume; 2) Global supply chain restructuring, businesses proactively investing in areas like AI ahead of time, and most sectors having adequately reduced inventory, making the business side also strong. This situation is expected to continue.
If interest rate cuts could drive down the risk-free rate, thereby enhancing market valuation, that would be good for investment. However, the current combination of a strong economy + weakening interest rate cut expectations means relatively high risk-free rates, but low risk premiums, stable valuations, and a stable macro environment, allowing for the confident pursuit of various structural opportunities.
Since the beginning of the year, the S&P 500 and Nasdaq indices have risen by about 10%, but there are many stocks that have outperformed the indices. Even within the Mega 7, performance has been very differentiated. If chosen correctly, there could be significant alpha, for example, Nvidia and META have performed very well, and Microsoft, Amazon, and Google have also done well, but Apple and Tesla have not. Looking back at the first quarter, we chose well-performing companies within Mega 7, continued to invest heavily in AI, and also discovered some opportunities in the consumer sector. These consumer companies are not so popular, and there's considerable market disagreement, but we see that these companies have each established competitive advantages in their niches and are expanding these advantages to more areas. If successful, this means a vast market space and very attractive investment returns. These companies have made a significant contribution to our performance, surpassing the market in the first quarter.
In China, the risk premium is currently at a relatively high level, and there's no significant risk of it increasing further. With signs of shareholder governance improvements, it might even decrease. Meanwhile, risk-free rates have begun to decrease, with further room to decline, so the probability of a systematic decrease in valuation is not high. The main focus will be on whether the fundamentals adjust adequately. Due to slower growth and increased competition, the adjustment of fundamentals in most sectors may still be insufficient, but opportunities can be found from a bottom-up perspective. In recent times, apart from cross-border e-commerce, no new opportunities have been identified. Moreover, even for cross-border e-commerce, the geopolitical risks faced are greater than expected and not easy to navigate. We indeed see signs of improvement in some companies' shareholder governance, such as refocusing on core business and ROI, and increasing dividends. The investment returns for these companies will primarily come from dividends rather than performance growth, so the sustainability of dividends will be especially important, a point on which we are not yet fully confident.
Market Outlook & Strategy
Macro Perspective: Domestically cautious and internationally optimistic, but maintaining an open mindset, ready to adjust views according to actual developments.
There's no significant change in the macro outlook. Domestically, concerns about a further overall devaluation have decreased, focusing more on whether adjustments in fundamentals are in place. The focus within the country is on exploring opportunities abroad.
Overseas, the concern is no longer mainly about interest rate cuts; the valuation system is relatively stable, focusing more on fundamentals. As long as the economy maintains its current resilience, there are many opportunities.
Where the Opportunities Are:
1) AI: An important source of medium to long-term alpha. The value of humans is increasingly high, and AI, by enhancing efficiency or even replacing human labor, correspondingly increases in value. This is just the beginning, with a very high ceiling.
2) Lifestyle Changes Towards Health and Self-focus: Changes towards healthier and more self-focused lifestyles will continuously present opportunities in consumption.
3) Post-Inflation Purchasing Power: The increase in purchasing power after inflation creates room for pricing some products/services higher, enhancing the relative competitiveness of high cost-performance products/services.
4) Entering an Interest Rate Cut Cycle: In the past, due to continuously rising interest rates, it was challenging to assess the risks interest rates could trigger. Companies with good competitive structures and long-term potential, upon resolving short-term interest rate risks, might also find opportunities.
5) Financial Technology and Other Emerging Investment Opportunities: The sector of financial technology presents new emerging investment opportunities, reflecting the growing integration of technology and finance.
6) Exploring Opportunities in Other Emerging Markets: Beyond established markets, exploring opportunities in other emerging markets can offer diversification and exposure to high-growth potentials in different geographical regions.
In summary, the strategy emphasizes staying adaptable, focusing on sectors and regions where fundamental and macroeconomic conditions indicate solid growth potential or resilience. Emphasis is placed on AI, lifestyle and consumer changes, financial technology, and exploring new markets, reflecting a forward-looking approach to capturing growth and innovation.
Comments