I. Operation Review: High Position, Little Change in Holdings, Still Heavily Allocated to Technology, Especially AI
This month maintained a high position, slightly reduced U.S. Treasury holdings, increased holdings in cloud computing that benefits from AI but is not fully priced. The industry is focused on cloud computing, advanced semiconductor manufacturing, the internet, branded consumer goods, defense, U.S. Treasuries, etc. The investment proportion in AI-related areas has increased, and U.S. assets (excluding U.S. Treasuries) remain around 80%.
II. Market Review: Frequent Domestic Supportive Policies, U.S. 10-Year Treasury Yields Surprisingly Surge to Over 4% Amid Inflation Easing and Slower Rate Hikes
This month, the most notable things are a series of domestic government statements and supportive policies to bolster the economy, and the unexpected surge in the U.S. 10-year Treasury yield to over 4% amid falling inflation. Specifically, domestic supportive policies focus on several aspects: 1) Optimizing real estate policy (currently the most anticipated is relaxing restrictions on first-tier cities and reducing existing housing loan interest rates), actively promoting urban village renovation, etc.; 2) Effectively preventing and resolving local debt risks; 3) Revitalizing the capital market; 4) Boosting consumption. However, due to factors such as population, urbanization, debt size, and changes in long-term expectations of residents & businesses, unless the central government leverages, other policies may mainly play a supporting role without reversing direction, and stimulating the economy through loose policy doesn't align with higher principles.
III. Market Outlook & Investment Thoughts
According to current policies and subsequent expectations, the risk of China becoming a "large Japan" is not eliminated, so businesses and residents may continue to pay off debts, reduce/cautiously consume and invest. In a slowing economic growth environment, performance on the profit side may be worse due to intensified competition in many industries. Also, recent military, pharmaceutical, and financial sectors are intensifying anti-corruption and cost-saving measures, possibly affecting business operations and pricing logic, and bringing difficulty to asset pricing with long-term visibility worsening. Therefore, we are relatively cautious about domestic investment opportunities, demanding higher risk premiums in valuation, and fully considering issues that may arise from economic growth downward adjustments, intensified competition, real estate and local debt risks, and the impact of resident and corporate balance sheet repair.
We remain relatively optimistic about overseas investment opportunities, although unexpected rises in long-term Treasury yields are negative for valuation, but a stronger-than-expected economy and a soft landing are becoming mainstream expectations, helping reduce risk premiums and favor valuation. Moreover, despite uncertainty about when interest rates will be cut, rate hikes are likely ending (the mainstream market expectation is no further rate hikes), especially if inflation continues to fall as expected, a rate cut is hopeful next year. We will keep an eye on the changes in interest rates arising from the short-term changes in the supply and demand relationship of U.S. Treasuries.
From a structural perspective, there are opportunities in technology and consumption, and the relative opportunity in technology is greater due to AI. AI is already showing an impact on listed companies, mainly increasing hardware purchases in Capex, and successively releasing AI products for customer trials and pricing. Revenue will gradually reflect the impact of AI in the second half of the year, and the impact will be more significant next year. In the semiconductor field for consumer electronics, which has come out of the inventory cycle, companies with good competitive structures and the ability to increase share and upgrade products will return to continuous growth, and traditional data centers robbed of AI budgets are in similar situations. Finally, after concerns about a hard landing in the economy decrease, coupled with AI and manufacturing reflow, corporate investment intentions are expected to increase, and consumer confidence is expected to remain strong, with investment opportunities in consumption, software, etc.
Current focus areas include:
AI: The most important future growth structural opportunity, mainly including semiconductors and software, while also focusing on the development of other application ends.
Structural Growth Opportunities in Semiconductors: Mainly optimistic about advanced processes and high-performance computing-related semiconductor opportunities, AI will accelerate industry growth.
Overseas Cloud Computing Investment Opportunities: Optimistic about serving large enterprise customers, competitive niches; integration with AI is expected to increase efficiency and enhance user value.
Structural Growth Opportunities in Financial Payment: Mainly optimistic about monopolistic companies with strong network effects.
Overseas Travel and Tourism Service Platforms: Investment opportunities benefiting from increased personalized demand in travel and tourism.
Consumption & Internet: Investment opportunities in leading niche segments that fit with consumer trends, solve underlying consumer needs, have potential for share growth, and faster growth; as well as areas closely related to high-end demand, investment in commercial activities with greater recovery potential and sustained growth in consumption.
Domestic Services: Represented by vocational education, there are still steady growth, value revaluation, and continuous dividend investment opportunities.
New Energy Vehicles: Optimistic about segments/companies that can establish long-term sustainable competitive advantages, but short-term industry deterioration is not over, relatively cautious.
Defense: Demand unrelated to macroeconomics, and likely to benefit from future great power competition, can reduce portfolio volatility.
Long-Duration U.S. Treasuries: Will benefit from future inflation decline, interest rate normalization.
Other directions including robotics, Apple XR, opportunities for Chinese companies going overseas will also be actively researched.
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