Chief Outlook | BlackRock Lu Wenjie: This year's A-share market is on the positive side, focusing on the wrongly killed stocks

The Paper's reporter Sun Mingwei

【Editor's Note】

2021 is an extraordinary year, behind the ups and downs of the A-share market, the traditional white horse stocks represented by the "Mao Index" have fallen silent, and the "Ning Combination" industrial chain has sprung up.

Entering a new 2022, how will the capital market interpret it? Recently, the surging news (www.thepaper.cn) reporter interviewed a number of securities companies chief strategist, chief economist, star fund manager, the pulse of the new main line of investment, tap new market opportunities, look forward to the new trend of the market.

This issue is a text interview with Wenjie Lu, Investment Director of BlackRock Fund and proposed fund manager of BlackRock Hong Kong Stock Connect Vision.

BlackRock Fund Investment Director and BlackRock Hong Kong Stock Connect Vision prospective fund manager Lu Wenjie

Lu Wenjie pointed out that looking at the past statistics, from the second half of 2020, whether it is active or passive funds, the overall inflow of A-shares is increasing. With the recent clearer direction of China's stable growth policy, the willingness of global funds to invest in the Chinese market is still strengthening.

"From the perspective of medium- and long-term allocation, our foreign-funded institutions will continue to increase their emphasis on A-shares, not only because the global allocation ratio of China's overall assets is low, but more importantly, the layout of A-share listed companies for global emerging industries and China's huge domestic consumer market is unparalleled, and China's economic and policy cycle is not synchronized with developed countries, so that in terms of obtaining growth opportunities and diversifying risks, A-shares have greater attraction to global institutions." Lu Wenjie said.

Looking forward to 2022, Lu Wenjie believes that A-shares in 2022 are unlikely to have a smooth road, because the market is still controversial about the specific timing and direction of the stable growth policy, and the balance between epidemic prevention and control and economic costs is also very uncertain. "But overall, the profitability of listed companies can be expected to grow when the manufacturing industry is still relatively prosperous, the consumer industry has recovered, and the policy and liquidity are favorable to the overall valuation, and we expect the A-share market in 2022 to be positive."

Lu Wenjie said that the industries of concern include the rebound of consumption, tourism and service industries that may be brought about by the gradual recovery of the epidemic; individual stocks that have been wrongly killed by the impact of industry policies (pharmaceutical collection and procurement, Internet anti-monopoly); new energy and new energy vehicles are the direction of high long-term certainty, and companies in industries with independent controllable technologies and further import substitution space on this track will be particularly interested.

"In addition, we will also pay attention to Chinese enterprises that will continue to gain overseas market share in the future, including technology and manufacturing enterprises that are leading the world in technology, enterprises that benefit from the international cycle of consumption, domestic brands going overseas such as home appliances, cross-border e-commerce, etc., and enterprises in third world countries that export technology." Lu Wenjie said.

BlackRock Fund obtained the public fund business license in June 2021, is the first wholly foreign-owned public fund management company, and in September of the same year, officially established the first public fund product, BlackRock China New Horizon Hybrid Securities Investment Fund.

Wenjie Lu is currently the Investment Director of BlackRock Fund and the head of the Investment Research Department. He was the head of investment of BlackRock Investment Management (Shanghai) Co., Ltd., the investment strategist of UBS Securities Co., Ltd., the portfolio allocation manager of Ping An Asset Management Co., Ltd., and the investment manager of China International Capital (Hong Kong) Co., Ltd.

The following is an excerpt from the interview between the surging news reporter and Lu Wenjie (slightly edited):

The Paper: Looking back at the A-share market in 2021, the effect of making money is not good, what do you think is the cause?

Lu Wenjie: Affected by the global epidemic, the overall downstream demand is relatively weak, coupled with the lack of supply-side production capacity caused by the epidemic, the overall upstream raw material prices will rise in 2021, and the cost pressure of enterprises will be greater; in the second half of the year, the impact of policies such as "double control" and "power rationing" will be superimposed, resulting in a sharp rise in the price of energy cycle products such as coal and natural gas, and the profit margins in the middle and lower reaches will be further squeezed and profitability will be damaged. Especially since the fourth quarter, it has entered a performance vacuum period, the market fundamentals have changed a lot, coupled with the disturbances brought by individual corporate events to the market, the game market is extreme, more structural markets, and the big opportunities for certainty are relatively limited.

The Paper: The Fed's latest dot plot shows that the median forecast for Fed officials is 3 rate hikes in 2022. What do you think of the current global macro environment? What impact will it have on the A-share market?

Wenjie Lu: We think the market may reflect too much of the probability of US interest rate hikes, although the current dot plot is expected to raise interest rates 3 times in 2022, but the Global Macro Research of BlackRock think tank believes that the Fed has adopted a new monetary policy framework after the epidemic. With a higher tolerance for inflation and a broader definition of employment targets within this framework, the Fed may raise interest rates more slowly than the market expects.

The global cost of funds and risk appetite have a significant impact on A-shares and even more on Hong Kong stocks. However, since the market has raised interest rates higher than expected, the possible dovish remarks of the Fed's 2022 monetary decision-making process will have a positive impact on the markets in both places.

The Paper: What is the reason for the net inflow of northbound funds in 2021 to hit a record high? How to view the current willingness and specific circumstances of foreign investment in the Chinese market?

Lu Wenjie: During the epidemic, China's economy took the lead in resuming growth under the strict, effective and high-enforcement epidemic prevention measures, which also allowed funds to see the resilience of China's economy on a global scale. Coupled with China's more orthodox monetary and fiscal policies, it has maintained or even widened the spread advantage over developed countries. As a result, the attractiveness of Chinese assets, which combines stability and growth potential, stands out in all emerging markets, and increases inflows of funds (China Stands Out).

Looking at the past statistics, starting from the second half of 2020, the overall volume of foreign capital, whether active or passive, is increasing. With the recent clearer direction of China's stable growth policy, the willingness of global funds to invest in the Chinese market is still strengthening.

The Paper: In your opinion, will foreign institutions continue to increase the weight of A equity in the future? Why?

Lu Wenjie: From the perspective of medium- and long-term allocation, our foreign-funded institutions will continue to increase their emphasis on A-shares, not only because the global allocation ratio of China's overall asset allocation is low, but more importantly, the layout of A-share listed companies for global emerging industries and China's huge domestic consumer market is unparalleled, and China's economic and policy cycle is not synchronized with developed countries, so that in terms of obtaining growth opportunities and diversifying risks, A-shares have greater attractiveness to global institutions.

From a short-term tactical point of view, overseas investors in the early stage are cautious about China's industry regulatory policies, which are clearly changing with the "steady growth" policy, and we expect that such funds may need to wait and see for a while, waiting for the policy to become more effective in the economy and corporate profitability.

The Paper: BlackRock has filed a new Hong Kong stock fund, but the Hong Kong stock market is performing poorly in 2021, how do you see the next opportunity?

Lu Wenjie: In 2021, due to weak consumption and rising prices of upstream raw materials, some industries have also experienced strong regulatory policies, and corporate earnings and valuations have been affected and their performance has been poor. We expect that the policy will turn in 2022, the superimposed CPI-PPI scissors gap will narrow, and the overall profitability of Hong Kong stocks is expected to reach a growth rate of more than 10%, combined with the recent Hong Kong stock market at a relatively low level, there are more clear investment opportunities.

We feel that we can focus on investment themes recognized by various types of investors in Hong Kong stocks (international investors, Hong Kong local investors, mainland investors), such as industries that are in line with national strategic development, high policy visibility and good prosperity. In particular, the growing varieties in the consumer service sector such as sporting goods, dairy, beer, etc.; as well as some industry policies, driven by their own technology and innovation, the Internet, pharmaceutical outsourcing services and other industries.

The Paper: In the past two years, the A-share market has been seriously differentiated, especially in 2021, the white horse stocks that were optimistic about foreign investors in the past have pulled back sharply, such as consumption, medicine, etc. What do you think are the main reasons? What do you think?

Lu Wenjie: In 2021, the consumer industry itself is not in demand, consumer confidence is declining, enterprise growth has slowed down, and under the background of superimposed epidemic counterattack, China has adopted a relatively strict zero-tolerance epidemic prevention policy, and the consumer sector has been greatly affected. In addition, some consumer goods before the inventory level is high, the valuation of the corresponding sector stocks at the end of 2020 is also at a high level, high base but looking back, as the epidemic enters the second half, demand is expected to gradually recover, combined with the PPI has turned downward, we believe that the upstream price will fall, some brands have been raising prices, effectively transmitting cost pressure, 2022 corporate profit margins are expected to be further opened, is a very noteworthy sector.

From the perspective of the pharmaceutical industry, since the gradual attention of innovative drugs by the market in 2018 to the epidemic in 2020, the market's attention to the entire sector of medical and health has gradually increased, coupled with the high profit margins of the industry itself, which has performed well. Since 2021, first of all, the valuation of the overall pharmaceutical sector has been digested, and as the epidemic gradually dissipates, the market expectations of the track benefiting from the new crown (such as vaccines, etc.) have fallen, and the stock price has also been reflected; coupled with the impact of various collection policies, the entire sector has indeed seen a sharp correction. However, in the future, medicine is an industry with long-term investment logic, especially in the context of the aging population and the pension economy, the attention of medical and health care and the updating and iteration of products and services will be further strengthened, and enterprises with high technical barriers and strong bargaining power are still the direction we are optimistic about.

Surging News: New energy vehicles, lithium batteries are the most eye-catching sectors in 2021, from the perspective of fundamentals and valuation, has it been overvalued? What segments are more noteworthy?

Lu Wenjie: The prosperity of the new energy sector is obvious to all, so the valuation must not be cheap. However, we believe that the new energy vehicle industry chain is still an area with high certainty of long-term prosperity in the future, and lithium batteries are also a very important part of it. Looking forward to the development trend of the new energy vehicle automotive field in 2022, with the gradual easing of the upward pressure on the prices of some upstream raw materials, we will pay more attention to the release of downstream demand for new energy vehicles.

We believe that the future of intelligent new energy vehicles is the key to triggering demand growth, and we are very concerned about some investment opportunities brought by intelligence to the industrial chain. In addition, we also continue to pay attention to the industry policy and some changes brought about by the development of the industry, such as the power exchange model.

The Paper: Dual-carbon investment is getting more and more market attention, what investment opportunities do you think there are?

Lu Wenjie: Policies are very encouraging for carbon reduction, from various documents and speeches of encouragement at conferences, to the central bank's introduction of carbon emission reduction to support low-interest loans, to the repeated emphasis on clean energy in economic work conferences. With the help of a series of policies, we believe that the following directions are worth paying attention to:

First of all, seeing that the state is promoting the mechanism of carbon emission trading, encouraging traditional industrial enterprises to save energy and reduce emissions, and using quotas for trading; superimposing the encouragement of new energy-related infrastructure, such as carbon emission reduction support tools, to a certain extent, to alleviate the financing pressure of enterprises, we continue to be optimistic about the photovoltaic industry chain, green power and other sectors.

In addition, at the Central Economic Work Conference, the transformation from "double control" to "double carbon" defined that "new renewable energy and raw material energy consumption are not included in the total energy consumption control", so we feel that there is also a certain degree of benefit to industries such as coal chemical industry with traditional energy as the downstream.

The Paper: In 2021, the structural market is getting more and more intense, do you think this situation will continue until 2022? Why?

Lu Wenjie: We think it will continue in the next quarter or two, mainly for two reasons. First, it is still in the vacuum period of performance, the market sentiment maintains the game, there will still be a more obvious style switch; on the other hand, the fundamentals of the overall economy have downward pressure, but with the release of economic work conferences and various policy signals, the national follow-up policy support and support space is relatively large, and the market liquidity is still reasonable and sufficient. Considering that the beginning of the year and before and after the two sessions will be a window of frequent policy occurrences, the structural market will continue with a high probability.

The Paper: Looking forward to 2022, what kind of market will A shares roughly go out of? Why?

Lu Wenjie: The market is still controversial about the specific timing and direction of the steady growth policy, and there is also great uncertainty about the balance between epidemic prevention and control and economic costs. This means that A-shares in 2022 are unlikely to have a smooth road. However, in general, the profitability of listed companies can be expected to grow when the manufacturing industry is still relatively prosperous, the consumer industry has recovered, and the policy and liquidity are favorable to the overall valuation, and we expect that the A-share market for the whole year of 2022 is still positive.

The Paper: Looking forward to 2022, which industries and directions are you specifically optimistic about? Why?

Lu Wenjie: The industries we will pay attention to include the rebound in consumption, tourism and service industries that may be brought about by the gradual recovery of the epidemic; individual stocks that have been wrongly killed by the impact of industry policies (pharmaceutical collection and internet anti-monopoly); new energy and new energy vehicles are the direction of high long-term certainty, and companies in industries with independent controllable technologies and further import substitution space on this track will be particularly interested.

In addition, we will also pay attention to Chinese enterprises that will continue to gain overseas market share in the future, including technology and manufacturing enterprises that are leading in the world, enterprises that benefit from the international cycle of consumption, domestic brands going overseas such as home appliances, cross-border e-commerce, etc., and enterprises in third world countries that export technology.

Responsible editor: Yes Dong Dong Photo editor: Jiang Lidong

Proofreader: Yan Zhang