Monthly Investment Report -202306

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-over-month after a few months of recovery at the beginning of the year, and expectations are turning weak. Private real estate companies face the risk of a second bottom, 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 capability (especially the middle class). The ability of local governments to underpin the economy is also limited, as the risk of local government debt has been more apparently exposed recently, and the process of deleveraging is not over. Although the central government has room to increase leverage, its working focus is on quality and safety rather than aggressively stimulating economic growth. Therefore, the central government 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 and weakened profitability. Typical examples include new energy vehicles, the chain coffee industry, local life, etc. On the other hand, there are a few industries that have formed a consensus that there is not much growth opportunity, making them transform from excessive competition to win-win, from expanding scale to improving efficiency, leading to expenses and margins better than expected, with e-commerce being a typical example. In general, the economy recovery is weakening, but the adjustment of supply takes time, so it is necessary to be more careful to discern whether it has competitive advantages to avoid excessive competition.

In the United States, due to the recent debt ceiling adjustment issues, the risk of a rate hike in June, and divergence in the path of interest rate cuts, the yield on treasuries once rose to 3.8% from a previous low of 3.3%. 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. Anyway, 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 are 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 the 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 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. The iteration of computing power technology will also bring about the upgrade demand and increased usage of various hardware, thus bringing various investment opportunities.

Market Outlook & Investment Strategy

There is no significant change in market views and investment strategy. The domestic recovery is weakening, the policy is playing a role in underpinning, and the medium-to-long-term growth may need to be adjusted downwards. More importantly, many long-term issues are unclear, which makes it very difficult to evaluate 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 landscape of the industry can improve in the case of slowing or even no growth in the industries.

Overseas, 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 space for the market's valuation decline is not large and it is more likely to improve. More importantly, some industries have already come out of the prosperity trough and have seen the opportunity for continuous structural growth under incremental demand, such as in the field of AI. In some industries, although facing a slowdown in growth, companies with significant alpha have emerged. Part of industries have already begun to improve efficiency, and with the empowerment of AI, the expanses have already begun to decline and there is still a lot of room for decrease 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 gradually crossed the 0 to 1 stage. In the long run, it is a market opportunity of trillions. In this process, everything from AI infrastructure to AI applications will benefit. On the one hand, it brings the opportunity for the strong to get stronger. On the other hand, there are opportunities to restructure the pattern from 0 to 1.

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.