The new market pattern under global inflation and the minutes of China's opportunity roadshow

On the evening of April 19th, BlackRock, a world-renowned investment institution, held an online exchange meeting, in which Li Wei, Chief Investment Strategist of BlackRock, Wenjie Lu, Investment Director of BlackRock Fund, and Liu Yajun, Fund Manager of BlackRock Global Emerging Market Equity Investment Team, focused on the new market pattern under global inflation and the theme of China's opportunities.

Lu Wenjie: What are some of the most important investment themes in the world, and what has changed since the beginning of the year?

Li Wei: We published three investment themes at the beginning of the year.

The first investment theme is coexistence with inflation, which we expect to continue and supply that is likely to ease by the end of the year, but we expect inflation to stabilize at a higher level than before the pandemic. The outbreak itself has had an impact on supply, but with the Russian-Ukrainian event, the impact on supply will be even greater, which will lead to slower growth and increase inflation. Inflation is not a thorny issue for China, but it is a daunting problem for the world. Because of inflation, central banks are canceling monetary stimulus policies one after another, and inflation in the United States, the United Kingdom, and Europe has basically reached a high level of nearly 40 years.

The second is to navigate through the fog, where many situations, such as geopolitical situations, could lead markets and even policymakers to reassess current levels of inflation. Central banks are inconsistent in their messaging. At present, many central banks are in a dilemma, on the one hand, they are trying to curb inflation, such as curbing inflation by raising the exchange rate, so that the impact on the economy and employment will be more obvious. Raising the exchange rate will hardly play a big role in dredging the supply chain.

The third is the net zero (net zero carbon emissions) transition. We believe that future climate change will be real, and the world is accelerating to achieve the net zero target. While achieving these goals may take longer than 2050 or more, investors should make their portfolios ahead of time to prepare for a net-zero transition. While the Russian-Ukrainian event has had some impact on recent market volatility, it can drive attention to energy security in the long run.

Lu Wenjie: There is a view that the Fed may raise interest rates by 75 basis points in one go in the future. What do you think about the Fed's interest rate hikes that the market is concerned about?

Li Wei: This is a very important issue not only for the United States, but also for the global market, and we believe that the actual interest rate hike of the Fed is not consistent with expectations. The current economy has reached a stage where no special policy stimulus is needed, but it is not realistic to shift from relatively moderate economic stimulus to "sharp brakes", which will lead to more obvious problems of economic development and employment. Supply chains are not fully recovered, and if demand is changed through interest-adjusting to curb inflation, the U.S. unemployment rate could rise from less than 4 percent today to 10 percent.

Lu Wenjie: To add, from some cases, it cannot be said that global inflation has not had an impact on China's economy. For example, the price of new energy vehicles has risen, which includes the price of lithium, the raw material for lithium batteries. In addition, the Russian-Ukrainian conflict has affected barley, and the price of our beer has also increased. In addition, the price of chips will lead to the price of some of our automotive chips also rise. Currently, China's CPI for March was 1.5%, far lower than that of the United States. So from this point of view, from the current inflationary environment in China, there is still room for further increase in China's economic stimulus policy.

Lu Wenjie: How do you view the geopolitical risks of Russia and Ukraine?

Li Wei: It is difficult to judge the development of the situation in the future, and we think it will last for a long time. If geopolitics cause oil prices and natural gas prices to remain at a relatively high price, such as oil prices are currently at $100/barrel and $130/barrel, and natural gas prices in Europe are at 105-115 euros/MWh, our expectations for the economy and inflation will change accordingly. From our research, if the price of oil and natural gas is at such a high price, the negative economic impact on the European region this year will be 2% to 3%. The impact on the United States is 0.5 percent, as the U.S. economy is relatively less dependent on Russia.

Lu Wenjie: As you said, the impact of the Russian-Ukrainian conflict on different regions is not the same. For China, I think that because of the particularity of the Chinese economy, such as energy, it will also be affected by the world, but China's own economic cycle is not the same as the world, and the policy cycle is different, which is also a big reason for global investment in China. Because only by finding differences can we fully diversify risks. Benefiting from the blessing of policies and other aspects, the advantages of China's infrastructure, construction machinery and new energy industry chains are very obvious.

Wenjie Lu: What is our latest global asset allocation?

Li Wei: For the stock market, we are still in a position. However, due to geopolitical and economic influences, we have recently reduced our positions from Europe and increased our positions in the United States and Japan. Among them, Japan's central bank will not raise interest rates soon, which is a relative advantage.

For the fixed income market, one of our investment philosophies this year is to reduce government bonds and replace government bonds with inflation-linked bonds. We are now reducing our positions in government bonds, including U.S. government bonds, because we feel that the prospects for developed market government bonds are still very challenging.

Host: What is the current view of some blackRock clients overseas, such as in Europe and the United States, on the allocation of Chinese assets?

Li Wei: My feeling is that the farther away from China [customers], the more cautious you are about investing in China. For example, U.S. customers are very cautious about China, European customers will be more cautious about investing in China, and Asian customers will be better.

From a strategic allocation point of view, the allocation of Chinese assets by global investors (global investors outside of China) is very low, so we have reason to increase the allocation of Chinese assets, especially Chinese bonds. Mainly from the perspective of returns and diversification of investment, we prefer government claims.

Host: How do you see the impact of the epidemic on the market?

Liu Yajun: It should be said that from the fourth quarter of last year to the present, in fact, the Chinese market has experienced countless things, large and small, but basically has undergone some controllable changes. Therefore, I think that some of the points that everyone was particularly worried about before have actually been answered to a certain extent, or they have been reflected in the stock price.

Moderator: Steady growth is an important theme of our year, what are your expectations for this?

Liu Yajun: Because the epidemic mainly started in the last two weeks of March, which will have a certain impact on the economy, the statistics bureau recently released the economic data for the first quarter (there will be a certain lag), so there may be a further decline in April. But we can see some clues from the data in the first quarter, such as which policies are endorsing steady growth.

Then, if the government wants to achieve GDP growth of 5.5% this year, it is likely to exert efforts at both the fiscal and monetary ends. At present, on the fiscal side, more cities have relaxed their real estate policies. This means that the "policy bottom" has been around or has been around for a while. However, the fundamental "data bottom" has not yet appeared, such as the statistics bureau in March data show that real estate sales and real estate land acquisition have still seen a (very large) double-digit decline. However, according to our statistics on the real estate situation of 70 to 80 cities in China, 10 cities have relaxed the proportion of down payment, and 5 cities have relaxed the qualification for sale. It should be said that these two are actually the most beneficial tools for relaxation and stimulation of demand. In addition, we can also see that there are now 40 to 50 cities that have seen a decline in loan interest rates, such as Nanjing has announced that real estate developers can further better (loose) use of pre-sale supervision funds, and can take out 60% as working capital. These are the crux of everyone's initial concern, which will cause a "hard landing" in real estate.

If real estate can really support the bottom, and can also carry out a certain rebound and recovery, we believe that this is a relative benefit to China's overall economy and the entire very long real estate industry chain.

Host: What is your outlook for China's stock market?

Liu Yajun: I think the performance of China's stock market should be driven by valuation and earnings. In terms of valuation, in the past six months to one year, as just mentioned, there are factors that have depressed the valuation of the Chinese market, which has reduced the predictability of profitability in the entire market, or weakened everyone's confidence in profit predictability, resulting in the market value of A-shares and Hong Kong stocks hitting a new low in recent years. But at the same time, we actually see some factors that build the bottom of valuations. For example, in the Field of the Internet, the version number of the game has recently been re-issued; in terms of Chinese stocks, the government is also very active in discussions with the United States. Therefore, to a certain extent, we still have a certain confidence in the valuation bottom.

In terms of profitability, the biggest fluctuation in profitability is caused by the epidemic, but the situation is also improving, such as the recent white list of 666 key enterprises in Shanghai to resume work and production.

In summary, I think a lot of pessimism has actually been reflected in the stock price, and valuations and earnings have turned around. What's more, in the medium to long term, some of the big trends haven't actually changed.

Host: What is the difference between your focus on A-shares and Hong Kong stocks? Which main lines are more optimistic?

Liu Yajun: I think the connectivity between A-shares and Hong Kong stocks is constantly increasing, but there are also differences, for example, we can also see that A-shares, especially the ChiNext board, and the US NASDAQ correlation is much higher than in the past few years. Because of the intervention of foreign capital, the two markets have become more and more convergent. A-share is more of the secondary industry (midstream enterprises), including (we are more optimistic) new energy, semiconductors or high-end manufacturing, etc., and some consumer enterprises. The Hong Kong stock market may be 40% to 50% of some traditional industries, including real estate, finance, etc., which are more focused on the layout of the tertiary industry. But in any case, I think the investment method in these two markets is common, and there are three main lines:

First, under the theme of inflation, we have made some upstream raw materials this year, including agricultural products, chemicals and other areas of layout. Because the upstream profits are now very considerable, and some of the upstream have global business targets such as copper, aluminum, etc., their global inventory is a very low level, in addition, such as global shipping is actually still in a situation of short supply.

Second, under the theme of carbon neutrality, the opportunities in the field of new energy can be tapped, after all, there has indeed been a differentiation this year. We're actually looking for local bright spots in the entire industry, and the valuation is still relatively reasonable.

Third, under the theme of demographic dividend, China's huge population and the continuous growth of the middle class will bring about the demand for consumption and medical care. Among them, this year, the impact of upstream raw materials is not so large, the demand is relatively stable, such as dairy, etc., we feel that this is relatively stable.

I will update the latest institutional research content and the highest quality seller research report every day in the WeChat public account: Hezhong Investment Research Institute, and interested friends can pay attention to it.

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