Market Review:
Domestic recovery is weakening, the room for U.S. interest rate rises is not large, and AI is the biggest structural opportunity for both China and the U.S.
The domestic recovery is weakening. New home sales have begun to decline month-on-month and expectations are turning weak after a few months of recovery at the beginning of the year. Private real estate faces the risk of a second bottoming out, and related investment, manufacturing and consumption in the real estate chain may also be affected. In addition, recent job losses and layoffs have also caused resistance to the recovery of consumption willingness and capacity of residents (especially the middle class). The risk of local debt has also been more exposed recently, and the process of deleveraging is not over. The ability of local governments to underpin the economy is limited. Although the central government has room to increase leverage, its focus is on quality and safety rather than vigorously stimulating economic growth. Therefore, the central policy plays more of a role in underpinning rather than following the old path of stimulating the economy by releasing water. With the weakening of demand recovery, supply in many industries is still increasing, leading to increased competition, weakened profitability, and typical examples include new energy vehicles, chain coffee industry, local life, etc. There are a few industries that have formed a consensus that there is not much growth opportunity, but instead they move from involution to win-win, from expanding scale to improving quality and efficiency, making cost input and profit margin better than expected, with e-commerce being a typical example. In general, the recovery of the economy is weakening, and the adjustment of supply takes time. It is necessary to be more careful to discern whether it has competitive advantages to avoid involution.
In the United States, due to recent debt ceiling adjustment issues, the risk of a rate hike in June, and subsequent differences in the path of interest rate cuts, the yield on treasuries recently rose from a previous low of 3.3% to 3.8%. However, overall, U.S. inflationary pressures are still declining, and it is unclear whether there will be a rate cut at the end of the year. Last month, the market's expectation for a rate cut was 75bp in '23, and it is now revised to 0-25bp, but the initiation of rate cuts next year is relatively certain. In general, under the conditions of weakening inflationary pressure, weakening economic growth, and high interest rates posing risks to the financial system, the room for interest rate hikes is very small, and there is a greater probability of a downward move. Economically, retail has begun to weaken recently, but the service industry still has resilience because employment is very good, so despite the economic downturn, overall demand still has resilience and there is no hard landing. In particular, we found that some companies can grow well against the trend almost unaffected in the case of industry slowdown, reflecting obvious competitive advantages. Therefore, even if there are expectations of a recession, we are not pessimistic about our consumption investment in the United States.
The structural opportunity of AI is very significant. The Q1 financial report and Q2 guidance of the AI computing power leader are very much ahead of expectations, reflecting everyone's optimistic outlook for AI and the race to invest and arm in advance. Software and cloud service leaders represented by Microsoft have also successively launched various AI copilot services and are expected to gain incremental users and higher fees as a result. If AI applications and commercialization can be achieved, it means that investments in computing power and other aspects will be sustainable and growing. The iteration of computing power technology will also bring about the upgrade demand and increased usage of various hardware, thus bringing various investment opportunities.
Operation Review
In May, the position was maintained stable, with a slight reduction in domestic consumption & services. The position of overseas AI-related targets rose due to the increase in stock prices. The industries are still concentrated in advanced process semiconductors, cloud computing, internet, defense, U.S. bonds, branded consumer goods, higher education, etc. The ratio of Chinese and American assets (excluding U.S. bonds) is about 25:75.
Market Outlook & Investment Thinking
There is no significant change in market views and investment thinking. The domestic recovery is weakening and policy is playing a role in underpinning it, and the medium-to-long term growth center may need to be adjusted downwards. More importantly, many long-term issues are unclear, which makes it very difficult to price investments. We will look for domestic investment opportunities under the premise of being relatively cautious about economic growth expectations and considering real estate and local debt risks. We place more emphasis on whether companies have competitive advantages and whether the supply pattern of the industry can improve in the case of slowing or even no growth in various industries.
On the overseas side, although there are uncertainties in the short term, such as how high the Federal Reserve's rate hike will be, when it will cut rates and how much. But overall, the market's valuation decline space is not large and is more likely to improve. More importantly, some industries have already come out of the trough of prosperity and have welcomed the opportunity for continuous structural growth under incremental demand, such as in the field of AI. Some industries, although facing a slowdown in growth, have seen companies with significant alpha emerge in the industry. Some industries have already begun to improve quality and efficiency, and with the empowerment of AI, the cost rate has already begun to decline and there is still a lot of room for decline in the future.
We still believe that AI may be the most important source of growth opportunities this year and for a long time in the future, and this is true for both China and the United States. AI's substitution and empowerment of labor in medium and high-end industries has crossed the chasm, and has successively crossed the stage from 0 to 1. In the long run, it is a market opportunity of trillions. In this process, both AI infrastructure and AI applications will benefit. On the one hand, it brings opportunities for the strong to remain strong, and on the other hand, it also has the opportunity to restructure the pattern from 0 to 1.
Main directions we are currently focusing on:
AI: This is the most important growth structural opportunity in the future, currently mainly including semiconductors and software, while also paying attention to the development of the application side;
Overseas cloud computing investment opportunities. We are optimistic about serving large enterprise customers in services, good competitive layout in segmented fields; coupled with AI, it is expected to improve efficiency and enhance user value;
Structural growth opportunities in semiconductors, mainly optimistic about opportunities related to advanced process semiconductors, AI will accelerate industry growth;
Overseas travel and tourism service platforms: Investment opportunities benefiting from the increase in travel and tourism share due to personalized demand;
Structural growth opportunities in the field of financial payments, mainly optimistic about monopoly companies with strong network effects;
Domestic service industry, services represented by vocational education still have steady growth, value revaluation, and continued dividend acquisition investment opportunities;
Internet platform companies with good growth and reasonable current valuations;
Companies with good development prospects and reasonable current valuations in branded consumer goods;
New energy vehicles: optimistic about links/companies that can establish long-term sustainable competitive advantages, the short-term view is that the industry layout deterioration has not yet ended.
Defense: Demand is unrelated to macroeconomics, and will benefit from future great power competition, and can reduce portfolio fluctuations with low relevance to other investments;
US Treasury bonds: Will benefit from future deflation, interest rate normalization, and are low-risk assets that are better than cash and different from stocks;
We will be happy to incorporate other directions that meet our standards.
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