Since 2024, the market has gradually stabilized under the background of stable growth policies and the expected reform of the capital market, but there are still differentiation and rotation of industries and sectors. In the current volatile market environment, what investment areas and investment opportunities are worth paying attention to? Today, we have invited Penghua's active equity experts from the fundamental investment system to explain the investment philosophy and investment framework to illustrate the investment philosophy and investment framework, and to gain insight into new investment opportunities together.
Changes and the way out of the active equity of public funds
Liang Hao, Vice President of Penghua Fund
Changes in public offering of active equity
First of all, there have been many changes in the current investment environment and investment scope, but the overall preparation of the industry to adapt to this change is insufficient. After the high point of the industry in 2021, the scale of active equity public funds continued to decline. At the same time, our holdings of free-float market capitalization continue to decline, making it difficult to become marginal pricing funds in the market. The inflow of Shanghai-Hong Kong Stock Connect, which is close to the investment philosophy, investment method and investment aesthetics of active equity public funds, is also decreasing, so that the overall pricing power is not in the hands of active equity.
Secondly, in the past few years, the track-type investment that everyone has sought after has also encountered many problems, and the tracks such as liquor and new energy have fallen one after another, and the reasons for the decline are different. For example, in the whole process of consumption upgrading, the liquor industry has gradually changed from the previous systematic and industry-specific pure β investment opportunities to higher requirements for management and product structure, and the track-type investment opportunities have gradually decreased. The new energy industry is very fierce due to domestic competition, so that when the industry is good, industrial funds continue to pour in, production capacity continues to expand, and when the industry declines, there will be a serious surplus. This has a lot to do with the domestic industrial environment and competitive environment, because in the past few years, the domestic development speed has been very fast, and the rapid influx of capital into high-quality industries is reflected in the investment side, which will inevitably show a high volatility state.
Although the macro environment we are facing now at the center of economic growth has appeared in 2015, 2019 and 2020, the policy environment is different, and the current policy transformation is very strong. In the medium and long term, this policy determination is conducive to the reshaping of China's industrial structure and healthier economic growth in the future, but it also makes the situation based on macroeconomic reversal no longer occur.
Growth investment has also faced difficulties in recent years. Specifically, the hottest growth investment in 2023 is AI, and in the context of the era of AI, AI-related concept stocks are performing well, and dividend-oriented companies are also performing well. However, after the bubble burst of the mobile Internet wave in 2015, the growth investment of public funds is mainly biased towards fundamentals and values, so when thematic and conceptual investment opportunities appear, a large number of public funds are difficult to adapt.
At the end of last year, based on the analysis of the whole market, we found that on the whole, public funds are more willing to buy growth and growth, but they are not exposed enough to the dividend factor. The data shows that the public offering of heavy stocks has more negative deviations in the low valuation factor and high dividend factor. Therefore, although the era of dividends may have arrived, public funds have not yet reached a consensus on dividend investment.
On the other hand, in the context of major industrial changes, there are many thematic concepts, and it is very difficult to invest in growth, and the investment method based on macro prosperity may fail in stages.
Responding to the changes requires us to reiterate our investment methods and knowledge systems on the one hand, and to think about how to redistribute our investment and research capabilities on the other. I believe that public funds that can solve these problems will usher in better development in the future.
The fundamentals of the future of public funds
Looking ahead, there are roughly the following types of investment opportunities:
The first category is the industry with global pricing, such as non-ferrous metals, petroleum and petrochemicals. The reason why the active equity of public funds in these areas has not been paid enough attention in history is that when we have more stable growth assets, we will naturally not focus on companies and industries with high global pricing, because these industries may face geopolitics, uncertainty and other factors, and the reaction will be very drastic, but these industries also have their own investment logic and tracking system. I often emphasize that bull stocks are not selected, but followed, and when we systematically accumulate knowledge in these areas, we can better grasp the opportunities. Therefore, in the future, public funds must spend more time and energy and deploy more investment and research forces to study this kind of global pricing industry.
The second category is industries with the advantage of going overseas. In the past two years, more and more Chinese enterprises have gone overseas, and these enterprises have been able to make good profits overseas by virtue of the competitiveness accumulated in the fierce domestic competition environment. Therefore, the industry with overseas advantageous production capacity is worth paying attention to, which has appeared in the power equipment and auto parts industries.
The third category is the long-term industrial trends spawned by the changes in the behavior of economic agents in the process of social development and change, such as the demand update of the aging society is still iterating and some growth industries, which are the investment areas that we have been cultivating in the past, in which there are still opportunities, but they may not be as abundant as before.
Finally, there is about dividend investing. Now it is really the era of dividend investment, the economy was in a stage of rapid growth, and active equity fund managers were not used to investing based on dividend yields, especially growth fund managers. However, in the environment of asset shortage in the whole society, I believe that more and more people will understand that it is better to take the equity of a high-quality company than to take a fixed deposit. Therefore, I believe that dividend investment will replace the previous stable growth investment and gradually become the ballast stone for the active equity of public funds.
In fact, the most advice we give to listed companies in our research is to increase dividends. Because in the past, when the company was in a high-speed growth stage, we made a PE valuation based on the growth rate, and when the growth rate decreased and the capital expenditure was not so high, we would make a reasonable valuation based on the dividend yield. Therefore, dividend yield may be the valuation method for many public funds to price companies in the future, that is, when the company's growth slows down, dividend yield is a very important indicator to maintain valuation, and everyone will reach a consensus on dividend yield investment in the future.
In the medium and long term, public funds may use dividend investment as a ballast stone, and at the same time actively deploy growth industries, global pricing industries, and enterprises and companies in the growth process, including these high-quality production capacity companies going overseas. Each type of asset has new research methods, which require us to re-arrange, re-sort out the knowledge system, and re-accumulate to adapt to such changes and environments.
Finally, I'd like to talk about AI. I think this is an unavoidable investment theme in the next 5-10 years, because AI may really change human production efficiency again, and every time human beings create advanced technologies that change production efficiency, the social structure will also change, such as the great changes in the industrial structure and social structure brought about by the Internet. But at this point in time, it is very difficult to invest in AI, first of all, it has high research barriers, and AI itself is a black box, we are not in it, and we are not clear about the specific structure inside. Even in the United States, there is an extreme shortage of such talents, and it is very difficult to spread knowledge. Second, the AI industry will fluctuate greatly, and the more revolutionary the innovation, the more tortuous the development process. It's not clear which companies will come out yet, but AI-related companies must also be high-volatility companies.
Specifically, the AI industry chain consists of four major links, the first is large models, the second is computing power, the third is applications, and the fourth is terminals. At present, AI hotspots are rotating layer by layer, and everyone is not concerned about the problem of computing power itself, but about a round of IT reconstruction. In the process of AI development, the entire IT architecture will be restructured, and even some new technologies are reconstructing von Neumann's architecture. Therefore, the market may have deduced the IT architecture restructuring brought about by the terminal many years later.
There are three main categories of AI applications. The first type is public domain knowledge, that is, knowledge that everyone can see, and the form of business is intelligent search engine, intelligent text management tools, intelligent data management platform, multi-modal literary graph, program generation and reconstruction. Now the number of users of these apps is gradually increasing in the ups and downs, because the AI will become smarter, constantly training, and constantly moving forward. Among them, the core lies in Prompt Engineer, that is, AI trainer. When you're used to GPT's way of answering and are able to ask good questions, it gives very high quality answers, while when you don't ask questions, it gives very low quality answers. As more people ask questions, so does the ability of AI. So, Prompt Engineer is a bottleneck in the public domain knowledge. Nowadays, many domestic companies are using GPT, even if the effect is not good, they still insist on using it, just to cultivate Prompt Engineer, they think that when more and more Engineers are cultivated, and the application of AI becomes more and more efficient, it can reshape the company's process. This is the application of the public domain knowledge field, which is currently in a benign upward state.
The other type is enterprise API access. At present, GPT promises that the data accessed by the API is only used for inference and not for training, but a large amount of data in this may be domain knowledge, such as pharmaceuticals have its related data, robots have its related data, and autonomous driving has its related data. Even though GPT now promises that data will only be used for inference and not for training, I believe that there are still many companies that are reluctant to put data on GPT for training due to concerns about data leakage. They will choose to buy tokens to generate content mode, and the model can't get the data and can't be localized for deployment, so they can only put your data on it for training, and then use it in the enterprise process after training the content. In addition, regarding programming, code refactoring in programming is not applied well now, but a considerable proportion of code generation in new programming in some companies can be handled by AI, which means that some manpower is saved. In addition, this capability can also be applied to the management of the knowledge base. The development of this type of AI application is mainly reflected in the rapid growth of the number of Microsoft Azure AI customers.
In fact, there are still many problems with enterprise API access, such as the number of users is still very limited, what is the main problem? Taking Figure, a robotics company invested by OpenAI, as an example, we actually don't know whether its model is placed on the device side or the cloud side, which means that its own data may not be willing to be put on it for training. For another example, Tesla Robotics and Tesla Autonomous Driving, even if they are one of the founders of GPT, are unwilling to upload core data to GPT to learn. Therefore, it is only when the domain knowledge is up that we can judge that AI may be a reconstruction of an industrial revolution.
At the heart of domain knowledge lies in open source and data security issues. If it is open source, it can be modified based on the open source model, but there is a shortage of corresponding talents. In addition, the IT architecture needs to be deployed in a private cloud or localized, for example, an enterprise can upload all the domain knowledge and learn it on its own, but only if it solves the problem of where the model comes from and where the engineer comes from. So, domain knowledge is the most effective field that can really change human society and reshape productivity, but we think it will take much longer to develop.
In the medium and long term, AI is the direction that needs to be strengthened in the next 3-5 or 5-10 years, but its development process may be very tortuous, and the current pace of market interpretation is relatively fast. Any investment opportunity corresponding to the change of human society will fluctuate, we can only increase research, when the industry cycle, Gartner curve after the second downward phase, the really good companies will come out, we can grasp in time.
Determined to be strong but not sharp, success is not fast for a long time. In the current changing environment, the active equity of public funds needs to reconstruct their own investment and research system, investment philosophy, and investment methods, as well as their own investment processes and workflows to adapt to this change. The active equity team of Penghua Fund is firmly working in this direction, and the hard work may not be immediately rewarded, but I believe that if we persevere, we will be able to see results in the future.
The market is like a river, there is always an opportunity
Wu Xuan Penghua Fund Equity Investment Department 1 Deputy General Manager
Select low-valued stocks and buy good companies at a good price
In the past 12 years, fund manager Wu Xuan has maintained a relatively stable investment style, with a low risk appetite, emphasis on risk control, and a selection of low-valued stocks, in a word, "buy good companies at a good price". In December 2023, Penghua Shengshi Innovation Mix was listed in the Top 7 (7/48) of the 10-year "Active Allocation-Large Cap Balance" stock fund by Morningstar China, and in the same period, Penghua Preferred Value Stock was also listed in the Top 5 (5/70) of the 3-year Shanghai-Hong Kong-Shenzhen Equity Fund by Morningstar China.
Wu Xuan's deep value investment style is particularly prominent in market volatility and drawdowns. From 2021 to 2023, the drawdown of Penghua Shengshi Innovation Blend is better than that of the benchmark and the market market. Its alpha does not rely solely on bets on undervalued stocks, but is based on a well-researched value-based strategy, forming a systematic stock selection and portfolio management plan.
In Wu Xuan's view, stocks are essentially a kind of income right certificates, reflecting the discounted value of expected corporate earnings and closely related to fundamental changes. Determining the degree to which the expectations of fundamental changes are reflected, i.e., over-undervalued or fully reflected, is the key to investing. In the long run, a sufficiently low level of buy valuations is an important factor in ensuring long-term investment returns. When sentiment is high, good companies don't necessarily equate to good stocks, as the optimism in the secondary market may have been reflected in stock prices, limiting potential future earnings. In the process of evaluating the value of individual stocks, Wu Xuan has formed a systematic valuation system, combining absolute valuation (DCF discount model) and relative valuation perspectives to improve the fault tolerance of the investment framework.
When evaluating the fundamentals of individual stocks, Wu Xuan not only pays attention to the changes in the short-term economy, but also focuses on the core factors that affect the medium and long-term profitability of the company, especially the company's governance structure. He favors companies that have been focusing on certain subdivisions for a long time, accumulating steadily, and treating external investors well. Not only that, Wu Xuan also attaches great importance to the competitive structure and business model of the industry, and will also carry out more industry tracking and research to verify these factors.
At the portfolio management level, Wu Xuan has also established a systematic portfolio management framework, and found companies with lower valuations and better quality through systematic screening in portfolio construction. Once such companies enter the value release stage, they will become the key allocation varieties of the portfolio, that is, the harvesting varieties. If you find a company with low valuation and good quality, but the value release has not yet entered the cash-out period, such stocks are seed varieties and will participate in a small amount or pay close attention. Wu Xuan hopes that the portfolio will be like a crop, with both varieties harvested in the current period and varieties laid out for the next stage, so that if it continues to operate, it can achieve good and consistent performance beyond the cycle. For the portfolio positions that have been invested, Wu Xuan will also closely track the changes in the fundamentals of the enterprise during the investment process, constantly balance the matching degree of fundamental changes and fluctuations in valuation levels, and strictly abide by the discipline of holding or selling.
In terms of competence circle, Wu Xuan focuses on three major areas with long-term competitive advantages: first, the large consumption field, because the large consumption field has a large market, and is easy to produce product differentiation and brand barriers of the company; the second is the direction of subdivided manufacturing, China is a big manufacturing country, with engineer dividends and industrial chain advantages, in the field of subdivided manufacturing, it is easier to give birth to high-quality investment opportunities with global cost leadership; third, the direction of license barriers, such as state-owned enterprises, central enterprises, financial industry, telecommunications operations, etc.
The market is like a river, there is always an opportunity
As an investment veteran who has experienced several rounds of bull and bear conversions in the A-share market, Wu Xuan has a deep understanding of the law of market development, he said frankly that the A-share market is undeniably characterized by strong cyclicality and volatility in emerging markets, and when the market sentiment is poor, investors' expectations are also more pessimistic; Although the current market is volatile at the index level, the CSI 300 Index has provided an annualized return of more than 9% from 2005 to the present, and the Shanghai Composite Index has also provided an annualized return of more than 11% from 1991 to the present, so in the long run, China's capital market is still full of opportunities.
This coincides with Siegel's point in The Long-Term Formula of the Stock Market: "The return of a stock depends on the quantity and quality of capital, productivity, and the return on taking risks." But the ability to create value also comes from skillful management, a stable political system that respects property rights, and the ability to provide value to consumers in a competitive environment. Investor sentiment swings due to a political or economic crisis can derail the stock market from its long-term trend, but the fundamental forces driving economic growth can always keep the stock market back on its long-term trend. That's why equity returns have shown such stability over the past two centuries, despite the tremendous political, economic, social changes that have affected the world." As long as the fundamental factors that pay attention to the return on capital still exist, the short-term ups and downs are only phased, and in the long run, the stock market is still the direction of asset allocation that is worth paying attention to.
Secondly, Wu Xuan believes that a deep understanding of market cyclicality is also crucial for investment, because the market is always in a repeated cycle from despair to hope, to growth, to optimism, and investors need to have a clear understanding of where they are. The best way to deal with it is to think more about the potential risks when the market is downwind, and to be in awe of the market, because when the market is optimistic, it is easy to produce excessive conformity, fear of missing out, the appeal of the masses, or blindly chasing high-risk opportunities;
A-shares are currently worth investing in
Two types of investment opportunities are worth paying attention to
From the perspective of the cost performance of stocks and bonds, Wu Xuan believes that A-shares are still attractive. The CSI 300 Index has undergone three years of adjustment since 2021, and the current PE valuation level is about 11 times. Even taking into account the impact of high overseas interest rates, the current stock-bond price relationship shows that the stock market is basically at a historic trough.
Although some of the main core market indicators show the signal of the market bottoming out, the market has successively had a large adjustment or volatility since the third quarter of last year, and the stock market has suffered three temporary factor impacts: the first is the phased rise of overseas high interest rates in October last year; the second is the possible adjustment of the mobile game policy at the end of last year, bringing about a phased expectation disturbance; the third is the interference of quantitative capital factors before the Spring Festival in 24 years, which makes the market further fluctuate on the basis of the bottom in the third quarter of last year.
At the policy level, after mid-July last year, important measures have been introduced in real estate and monetary policy. Both GDP and PPI have also shown signs of bottoming out since August last year, and although macroeconomic indicators are not bright and strong enough, they are not as pessimistic as the stock market has shown in the subsequent stages. With the gradual implementation of a series of policies, the decision-makers in 2024 have also released a higher GDP growth target, these policy information is very positive, after suffering from the impact of the previous three temporary factors, the stock market is likely to bottom out and rebound upward is worth looking forward to.
With the continuous improvement of the basic system of the capital market, the sustainability and growth ability of A-share dividends have also improved significantly. Recent annual reports have intensively disclosed that in the 2023 dividends, listed companies' consideration of dividend payout ratio has also increased significantly. Even though there are still some concerns about the macro aspect of the A-share market, focusing on the changes in the basic systems of individual stock performance and the market, the favorable factors are increasing, and increasing dividends can allow investors to enjoy the return of real money.
Although the market has experienced a rebound after the Spring Festival, Wu Xuan still believes that the current market is at a relatively low bottom. With the disclosure of annual and quarterly reports, concerns about macro and individual stock fundamentals will also be released to a certain extent, and there are two types of investment opportunities worth paying attention to.
The first type is a "dumbbell" configuration that investors have a consensus on, which consists of two parts. One part is an investment opportunity with low valuation and high dividends, and the other part is a growth sector like AI and the Internet, with the systematic valuation downgrade, the valuation level of some high-quality stocks is attractive. There are a lot of structural opportunities at this stage, which is the ballast stone of dividends and growth areas with reasonable valuations.
The second category is structural opportunities driven by return on assets. Investors like to chase short-term high growth, and the company's individual stock performance has short-term high growth performance, so they are willing to give valuation. Theoretically, the value of a company is not determined by the growth rate alone, but by the return on assets and the growth rate together. With the slowdown of the general environment, whether it is manufacturing or service, if there is a type of company with good fundamentals, sustainable competitive advantages, and the industry competition pattern is relatively stable, the level of return on assets can be maintained at a high level, even if the performance is moderate, at this stage of the valuation is generally low, such a high return on assets and excellent operating quality of the company is also worth paying attention to.
epilogue
The more ups and downs the equity market is, the more Wu Xuan believes that we should adhere to objective and rational thinking, not overly succumb to short-term market fluctuations, respond to short-term fluctuations with strict investment discipline, and examine the context of the times in a longer dimension.
Looking ahead to 2024, he remains cautiously optimistic about equity assets. The domestic macro is gradually stabilizing, the pace of overseas interest rate hikes is slowing down, and the opportunity cost of investing in equity is also declining. After three years of market correction, many factors have been fully reflected in valuations. In the long run, we should be optimistic and confident in China's strong economic potential and corporate resilience, and value-creating enterprises with a high degree of marketization, strong innovation capabilities, and good at seizing transformation opportunities will become future winners.
With innovative drugs as the spear, we will explore a new blue ocean for pharmaceutical investment
Jin Xiaofei is the deputy general manager of the second equity investment department of Penghua Fund
Pharmaceuticals are expected to start a new cycle
First of all, if the pharmaceutical sector is regarded as a commodity, and the price of commodities is determined by supply and demand, we need to clarify from the two perspectives of stock and increment, how much capital is willing to allocate to the pharmaceutical sector.
From an incremental point of view, although the total scale of the pharmaceutical fund once fell to a low point in Q3 of 2022, the total plate of the follow-up pharmaceutical fund continued to grow, and there were some structural changes. Because when the pharmaceutical sector enters an upward trend, active funds significantly outperform passive index funds, and people tend to buy active products, while when the pharmaceutical sector enters a downward trend, people tend to buy passive products. In the past three lines, the pharmaceutical sector has continued to decline, so the scale of pharmaceutical index products has expanded from 60 billion in Q2 of 2021 to more than 160 billion. (Data source: Industrial Securities) Subsequently, as the pharmaceutical sector ushers in the upward trend, active pharmaceutical funds will usher in a large incremental subscription.
From the perspective of stock, there has been a year of great volatility in the pharmaceutical sector, which is related to the view of the whole market on the pharmaceutical sector. In 2023, the two rounds of pharmaceutical markets at the beginning of the year and the end of the year will be brought by the institutional full-base pharmaceutical sector. As of Q4 2023, the pharmaceutical holdings of all market institutions (excluding the pharmaceutical base) are 6.6%, which is still underweight. According to historical experience, we believe that in the next three years, with the opening of a new pharmaceutical cycle, institutional holdings will return to a historical high of about 15%.
If the median of the pharmaceutical fund and the whole base is fitted, it can be found that medicine is an amplifier of the market rise, a purely offensive sector, and a long-term bull industry, and every round of market bull market is not absent. For example, in 2020 and 2023, Penghua Pharmaceutical Technology Equity Fund has achieved the first good results in its category (data source: Galaxy Securities, the same category refers to the pharmaceutical and medical health industry equity fund, ranking 1/22 in 2020 and 1/42 in 2023).
Multiple positive resonance, continue to be optimistic about innovative drugs
China has been in a period of accelerated aging for a long time, entering a deep aging society with an elderly population of more than 14% in 2021 and a super aging society with an elderly population accounting for more than 20% in 2032, and the demand for diagnosis and treatment will continue to grow at a high rate in 2023. (Source: Yearbook of Health Statistics)
At the same time, the policy dynamics are cyclically interpreted, and the current innovative drugs have become the direction of clear and focused policy support. Since the beginning of the vigorous control of fees in 2018, the medical insurance negotiations in 2023 are the mildest price cuts, and it is expected to return to the pre-cost control state in the next 2-3 years, and the pressure of price reductions will gradually ease.
We also have some of our own understandings and views on the issue of "full chain" support for the development of innovative drugs that the industry paid attention to some time ago.
First of all, if it is clear that the positioning of innovative drugs is "new quality productivity", the innovative drug industry will become an "economic growth engine". Second, if innovative drugs want to become a global advanced productive force, they need to set a goal to make breakthroughs in key technologies and key products by 2025. Third, assuming that the state supports innovative drugs in an all-round way from the aspects of R&D, approval, application, payment, investment and financing, and data resources, the most important of which is the strong policy tilt on the varieties of "encouraged application catalog". The last time the medical insurance was established to encourage the application of the catalogue was in 2010, when the new rural cooperative cooperative system brought rapid increments, traditional Chinese medicine injections, auxiliary drugs ushered in a large market, and now the auxiliary of innovative drugs can also be cited in this way. Fourth, if investment and financing are liberalized, financing channels can be reserved for unprofitable innovative drug companies. Fifth, if real money enters the primary and secondary markets, it can cultivate medium and long-term investors in innovative drugs, promote pension funds and enterprise annuities including social security funds to carry out investment in innovative drugs, and give more assessment incentives and policy preferences.
If the full-chain policy support continues to be implemented, it will become a major positive for the innovative drug sector, and it is expected that innovative drugs will enter a sustainable and valuation stage. From the perspective of DCF, the post-launch cycle of innovative drugs will be longer, and the peak sales are expected to be higher. From the perspective of PS, the price of innovative drug products refers to overseas pricing, and the investment is expected to refer to the overseas valuation system. We can call for increasing the number of science and technology innovation indexes, including various broad-based ETF indexes, and increasing the speed of innovative drugs entering the pool.
In general, the whole chain of support for innovative drugs will inevitably revolve around the comprehensive support of more than 20 ministries and commissions, and the central leadership level will coordinate and support. As long as the policy is introduced, even if there will be short-term market fluctuations, it will also bring double incentives for the collective valuation and performance of the innovative drug sector. If there is an application catalogue for performance, there will be a process of matching and application, and the valuation is determined by the height of policy setting.
In fact, China has only a short time to make innovative drugs, and large-scale research and development has only begun in the past five years. Before 2022, there were very few products approved by the FDA in China, but at the end of 2022, we judged that innovative drug companies would go overseas, which finally confirmed the non-linear explosive growth of innovative drug authorization in 2023, both the number of authorizations and the amount of down payment for the total package are getting larger and larger.
This is inseparable from the improvement of the technical capabilities of China's innovative drug companies. At present, Chinese innovative pharmaceutical companies have been able to participate in the world's most cutting-edge new technologies, and are expected to lead the progress of the world's most advanced technologies in individual sub-projects.
At present, there are still differences in the market on innovative drugs, and there are mainly the following two types of views:
Divergence 1: The profitability of innovative drug companies cannot be proven so far, but everyone understands that industries with high investment, high R&D expenditure, and very high technical barriers must have a long process of accumulation.
Divergence 2: There is no unified valuation system for innovative drug companies. Now that China is in a new stage of high-quality development, innovative drugs are part of the new quality of productivity, and they should usher in high growth, explosive growth, and non-linear growth, and enjoy a high growth premium. The immaturity of the valuation system is a good thing for innovative drugs at this stage, which may be a source of large income and bring upward flexibility in valuation.
Although there are differences in the market, we only need to grasp the core logic of innovative drug investment: first, the industry is supported by policy settings, second, the industry is thriving and prosperous, and third, the historical review shows that A-shares that meet the above two points reflect a high liquidity premium. After these three facts are established, everyone will have their own standards and participation rhythm in their hearts.
Always optimistic, investment does not stop
Chen Jinwei, Deputy Director of Equity Investment Department II of Penghua Fund
"541" investment system
If I had to sum up my investment style in one sentence, it would be better than "undervalued growth investing". In my opinion, good companies, low valuations, and high prosperity are the "impossible triangles" in investment, and different investors allocate weights among these three factors. For example, if you emphasize entrepreneurship and high-quality assets, you will give more weight to good companies, deep value fund managers will emphasize low valuations, and fund managers who are good at investing in prosperity, tracks or industrial trends may put industrial trends at the top. From my personal point of view, if there were 100 points, I would give 50 points to good companies, 40 points to low valuations, and 10 points to high prosperity.
First of all, I am a growth stock investor, but my definition of growth is more based on the perspective of business status, that is, after making money, it is used to expand, and after making money, it is used to pay dividends, which is value stocks. Therefore, our definition of a good company is not limited to core assets, as long as the governance structure is perfect, friendly to minority shareholders, competitive in the subdivided industry, and the industry ceiling has not yet peaked, it belongs to our definition of a good company.
Secondly, I put more emphasis on low valuations, which will give 40% weighting, second only to good companies. The importance of valuation is that even if there is a mistake in judgment, the loss is limited, and high valuation means harsh assumptions that may not be realized in the long run, especially the longer the time, the greater the possibility of being wrong. Therefore, valuing means that we recognize the limitations of our research and accept our imperfections.
Thirdly, we agree with the industry trend and prosperity, and give a 10% weight, but we rank relatively low in these three factors. Because I believe that the value of industrial trends lies in the incremental market space, investing in growth stocks is investing in a state of expansion, and it is easy for companies to expand when the demand for the industry grows. However, it should be emphasized that the determination of the industrial trend is not equal to the determination of the company, and the more certain the industrial trend, the more likely it is to bring about a certain increase in supply, but it will impact the certainty of the investment target, so we will put the industrial trend in a relatively backward position.
There are also limitations to our investment strategy.
First, our products contain two assumptions: 1) the world will get better and better, and 2) the capital markets will reflect the intrinsic value of companies over the long term. We do not question these two assumptions, and we do not try to avoid short-term fluctuations based on these two assumptions, but are always looking for opportunities, always maintaining optimism, and reflecting this optimism in our positions. Because we believe that holding equity is better than holding cash in the long run, except in extreme cases, we rarely time our positions.
Second, we believe that dividend assets and growth assets have different sources of return, and since macro assumptions are not the most important link in our decision-making chain, we do not yet have the ability to control assets with different sources of income at this stage, so the current strategy does not include dividend and deep value assets.
Stand at a new starting point and tap new growth
The consensus is that there is a huge bubble in microcaps and that the small- and mid-cap style has failed, but we don't share that view. Unlike other indices, the micro-cap index is compiled on a daily basis, screening the 400 companies with the smallest market capitalization across the market, and as long as these 400 companies rise, they will be removed from the index the next day. Therefore, the micro-cap stock index always shows a unilateral rise because the overall momentum effect of A-shares is not strong. If we look further at the constituents of the micro-cap index, we can see that there is no significant upward shift in market capitalization. Perhaps most of these companies have no investment value, so we are not systematically bullish on the small-cap factor, but because there are three to four thousand small- and mid-cap stocks in the market, we think that a very small number of them may be an important source of alpha in the coming period.
In the past few years, micro-cap stocks have seen indiscriminate and systematic gains due to the rally of quantitative funds, and the collapse of micro-cap stocks at the beginning of this year provides fundamental investors with a fundamentals-driven investment opportunity. Based on the current macro environment, whether from a bottom-up or top-down perspective, the limited growth that we can see (both in booming sectors and growing companies) is still mostly in niche markets. We are currently optimistic about the bottom-up selection of small and medium-cap companies in consumption, pharmaceuticals and manufacturing (including lithium batteries, manufacturing overseas, etc.), and we will focus on consumption as an example.
Three major trends are nurtured, and new opportunities for consumption and investment are introduced
At present, the market is pessimistic about consumption, and the source of pessimism lies in the belief that consumption is a pro-cyclical industry. But in reality, the economy we perceive often comes from asset prices. Taking the impact of housing prices on consumption as an example, the rise in housing prices has both a "wealth effect" and a "crowding out effect". The former refers to the fact that rising housing prices will increase the value of residents' assets, which in turn will promote residents' consumption. The latter refers to the fact that the rise in housing prices will increase residents' spending on buying and renting houses, which in turn will drag down residents' spending power. Whether it is from foreign or Chinese data, for the home-owning group or the middle-class group, the decline in asset prices will indeed suppress the consumption tendency. But on the other hand, consumption also has a crowding out effect, and if asset prices fall, it will reduce the burden on more groups of people to some extent. Therefore, the economic disadvantage we feel is more a reflection of the concept of asset prices, but in fact, more groups are not bad at spending.
In recent years, "consumption downgrade" has often been mentioned, but in my opinion, many of the so-called "consumption downgrades" are due to supply chain or channel innovation, which allows consumers to buy higher quality goods at lower prices, and some macro and meso data have verified this. At the same time, I believe that cost-effective consumption will also reshape the value of the entire industry chain, thereby generating new investment opportunities. For example, in the past, we were not very optimistic about some companies that were originally engaged in OEM business or manufacturing business but wanted to invest in their own brands. Because the culture of OEM companies is relatively pragmatic, focusing on timely feedback and timely response, but the time of the input-output ratio of consumer goods companies is mismatched and there is great uncertainty, so the culture does not match. But the biggest difference between cost-effective consumption in the past two years and the previous brand consumption is that brand consumption is a process of three-point products and seven-point experience, and cost-effective consumption is a process of seven-point products and three-point experience. As a result, many atypical consumer goods companies have stood out in the past two years.
Second, we focus on the consumer investment opportunities brought about by an ageing population. In terms of the number of newborns, after more than a decade of baby boom from 1962 to 1963, this group has gradually reached the age of 60 in recent years. In the next decade, China's population over 60 years old will grow by about 80%, corresponding to an annualized growth rate of 6%-7%. If the consumption base is the population base, then the annualized growth of ageing-related consumer goods will increase by at least 6%-7% on this basis. Last year's Tmall 11.11 data also showed that aging-related products, such as health care products, household medical devices, and home furnishings for the elderly, were able to achieve double-digit growth. And, because the overall level of education and material abundance enjoyed by this group of retirees when they were young is higher than that of the previous older group, they are likely to form a brand awareness, and new investment opportunities will continue to emerge.
Third, we remain cautiously optimistic about consumer goods going overseas as a whole. At present, there are also some opportunities for consumer goods to go overseas, mainly including two aspects, on the one hand, they are exported to Europe and the United States, and on the other hand, they are exported to Asia, Africa and Latin America. People like to cite the example of Japanese consumer goods going overseas, but I think the situation in China is different from Japan, which has implemented an internationalization strategy from the beginning, and Chinese companies are only now starting to try in this direction. So, from the perspective of cultural identity, I think the European and American overseas routes bring us more investment opportunities in niche markets. The export of consumer goods to Asia, Africa and Latin America will be limited by a country's GDP or population base, such as Africa's more than one billion people, but the per capita GDP is very low, Southeast Asia's per capita GDP is not low, but the total population is only 6-700 million. This is an example of why we need to find opportunities in small-cap companies, because going overseas is not going global to support a large number of large-cap companies to achieve significant growth, but we can find niche markets, niche regions, or niche products, and small-cap companies are often the beneficiaries of these products.
There are systemic investment opportunities in pharmaceuticals
The second promising direction is medicine. In terms of the long-term profitability of the pharmaceutical industry, the proportion of companies that have never declined in revenue and profits in history, the pharmaceutical industry ranks first. Because in my opinion, the excess return of medicine comes from two points: first, the pharmaceutical itself is a principal-agent model, and the payer and the user are separated, but all the business model of this principal-agent model has excess returns; second, many pharmaceutical companies have taken the risk of innovation and should enjoy excess returns.
Second, both supply and demand have growth potential. On the one hand, the progress of life science technology is the longest-term and bottom-level growth logic of the supply side of the pharmaceutical industry. On the other hand, the aging population is accelerating, and the baby boomer population in the last century has reached the age of 60, and the demand for medical care has increased significantly.
Third, the National Medical Insurance Fund is one of the main bodies of medical payment, and looking forward to the next 10 years, there is no need to worry about the ability to pay for medical insurance. At the same time, the out-of-hospital market is not subject to medical insurance.
On the whole, the pharmaceutical industry is naturally "noble" compared to other industries, and the overall valuation of the pharmaceutical industry is lower than that of other growth industries, so I think there are systematic investment opportunities in medicine.
The manufacturing industry is expected to usher in an increase in utilization
The third is optimistic about investment opportunities in the manufacturing industry, including lithium batteries and manufacturing overseas. Taking lithium battery as an example, the contract liabilities that represent the real capital expenditure of lithium battery enterprises have begun to fall since the first quarter of last year. When the industry is overcapacity, its second-order conductor has been turning negative for a year. In the first half of this year, the lithium battery industry is still at a low point of capacity utilization, and there may still be pressure to reduce prices, but the slope of capacity expansion has slowed down significantly, and it is hoped that the second half of the year will see the improvement of product utilization rate in batteries, hexafluorine, anode, ternary and other links.
Improve pricing power and face investment uncertainty
Zhu Ruipeng, fund manager of the second equity investment department of Penghua Fund
First of all, it is difficult for investors to remain objective in the midst of market volatility, because emotions can spread and contagious, and it is difficult to escape from it. However, if we look at the index in a longer term, we can see that the market has experienced a mirror image of first rising and then falling in the past five years. In the upward cycle, the macro environment is stable and improving, and the accumulation of money-making effects, the growth of institutional investors and the dividends of Internet channels have all contributed to the upward process. In the downward cycle, the market has experienced a decline in fundamentals, the continuous fading of the money-making effect, and a full range of deleveraging processes in the negative feedback process of increasing volatility and falling indexes, which is also the reason why the market has been relatively volatile in the past few years.
Now that the index has returned to the starting point of 2019, every market entity is reflecting, reviewing, and looking back on the gains and losses of the past five years. In such a relatively low background, the index has also come out of the volatile rebound.
In the process, institutional investors face new challenges. Despite the ups and downs of the market, the management scale of large asset management industries, such as public funds, insurance, trusts, bank wealth management and other institutions, is still growing steadily, and the allocation of equity assets is becoming more and more demanding. After the growth of scale, institutional investors are facing the test of investment experience, investment ability, and adaptability of investment framework.
At the same time, there are many anomalies in the capital market, for example, in the short and medium market cycles, it is difficult for investors to distinguish whether they are the lucky ones of the market or the trendsetters of the times. Therefore, how to find assets with management capabilities, investment capabilities, and matching liabilities after scale growth is a common challenge for institutional investors.
Against this backdrop, there have also been new features in the market, which have not been so evident in the stock market over the past 20 years. For example, research convergence, consistent behavior, and sensitivity to response to marginal information. In the face of fierce competition, investors' behavior has gradually deformed, from focusing on investment logic and investment value itself, to focusing on poor expectations and reflecting high-frequency data. In addition, there are more and more allocation-based needs, tool-based products, and label-based products, and everyone has shifted from focusing on investment value and the investment ability of the fund manager itself to his investment strategy and investment style. In addition, the assessment indicators are becoming more and more refined and process-oriented, which invisibly exacerbates the competition and psychological pressure of practitioners.
Investing is somewhat anti-human, so at the bottom of the market, I feel like it's okay to try to be light-hearted and objective. To quote the famous economist Jugra of the cyclical school - "the only cause of a depression is prosperity", then the only reason for a bear market may be a bull market. Of course, we have to reflect and improve, but at the bottom of the index, we might as well be positive, a new market cycle has begun, and this time it is no different. Although China's capital market has experienced more than 30 years of development, it is still relatively young, and we need to objectively understand the market cycle and the beta of the times. In the short term, the market is very easy to linearly extrapolate the index trend, if you are carried away by this negative sentiment, only see the pessimistic factor, ignore the value and common sense, then in the stage of market reversal, such investors will also be difficult to reverse in psychology and action. I believe that investment is a process of seeking, seeking truth and seeking the truth, not only to understand the market, but also to understand the world, the objective laws and ourselves. Active fund managers also have their own unique comparative advantages, and we tend to look at the market from a perspective of relative long-term value, with an open and positive mindset, and a mindset to pursue excellence.
Cyclical thinking vs. growth mindset
At present, we believe that a new market has probably opened. Investing is a very interesting industry with different perspectives, different mindsets and different positions, which leads to different behaviors. For example, in the current market, a pessimistic person will think that he needs to settle down after a rebound, so he will redeem it, while an optimistic person will think that he has just come out of the difficult situation and should actively look for opportunities.
This reflects two types of thinking in investing: cyclical thinking and growth thinking.
Cyclical thinking is often associated with contrarian value, and the core idea is that the competitive factors and external environment on which development was based in the past will remain stable in the future. Therefore, at the bottom of the market, we should look for some companies with a good competitive landscape, stable competitive advantages, and have not been changed by the times, and there may be some investment opportunities for value repair in the future.
The core idea of growth thinking is that the current investment environment and trends are difficult to change in the future, and even further strengthened, so they are cautious about most of the industry companies with weak fundamentals, and should look for a small number of prosperity and growth varieties.
Here, we are not trying to discuss the rights and wrongs of these two types of thinking, but rather to clarify the different investment stances and look at market behavior realistically and pragmatically. We do not deny that many long-term problems still exist, but magnifying long-term problems in the short term, ignoring value and common sense, is itself an emotional manifestation.
How should institutional investors respond to this market backdrop? We believe that in this case, it is important to increase their pricing power. Investment is future-oriented, and the ability to invest is, to a certain extent, the ability to simplify the complex and see through the essence in the face of an uncertain environment. When there is a bubble in the market, we must respect the market, but we should remain sober, not blindly confident when the bubble is in the bubble, not overly pessimistic when the trough is low, and believe in common sense and value.
Of course, we have learned a lot in the past few years and have not given investors a very good investment experience. While we have confidence in ourselves, it takes time for our customers to know and understand us. In our daily work, we maintain a high intensity of thinking and discussion, hoping to improve the investment process and investment cases through continuous iteration and hard work, and step out of the comfort zone and face the future. These efforts may not be very helpful for short-term investment performance, but they will make our portfolio, mindset and investment performance more balanced, and improve our ability to judge the future.
In the new market cycle, there are also differences on how to choose stocks and industries to invest in. Especially in recent years, the market has become more and more inclined to look for beta, label, and main line, but we believe this is a relatively outdated investment paradigm. In the history of A-shares, there will always be relatively strong investment themes at different time stages, which are related to the industry and market cycle at that time, but past investments are often not necessarily applicable in the future, and the meaning of growth stocks and value stocks in different market stages is different. We believe that there will still be new investment opportunities in the new market cycle, and institutional investors also need to undertake the historical mission of exploring new investment opportunities in the new era environment and market background.
Hold firm in the bottom area of the market
Returning to the market, we have observed that the style of institutional investors has returned to this year, and the large-cap index has also performed well among the global asset classes since the beginning of the year. From a stock selection perspective, we also see a gradual return to fundamental factors. Strategically, we take this sign very seriously, believing that now could be the beginning of a new investment cycle for the market, but tactically, we want to stay on the ground. Because on the asset side, data such as new home sales, real estate investment, manufacturing investment, and consumer prices all point to the fundamentals that there is still a period of transition period at the bottom, and on the liability side, equity assets have not felt good in the past two years, which has also brought investors the idea of falling into their pockets after the rebound. Therefore, whether it is fundamental or trading, it still takes some time for investors' mindset and behavior to adapt to the new market cycle.
For me, the new market cycle will be more about the investment style. As you know, my investment style is cyclical growth. The meaning of the cycle is to clarify the margin of safety, manage the risk of drawdown, and use the cyclical fluctuations to find a good price, which has the characteristics of not following the trend and reversing the value. The meaning of growth is that we hope to make money for performance growth, make money for enterprise growth, make money for industrial development, make progress in stock selection, try to find companies with growth and expected space enough, and I hope to seek continuous breakthroughs in the medium and long term of enterprise value and fund net value.
In view of the characteristics of this year's market, I am also constantly improving the tactical level. For example, in the past, my turnover rate was at a low to medium level, but this year, in the environment of the market bottom rebounding and investment opportunities diverging, the turnover rate has appropriately increased to a certain extent. In addition, I have further strengthened my management in terms of process, trading discipline and stock selection discipline. At the same time, we are more diligent in our desire to translate the research coverage of the past few years into investment results.
For some specific industries, I also have some of my own views to share with you.
At present, the resources are in a high boom stage, and the performance is very good. Taking copper as an example, the price center has been increasing since 2016, and the upward cycle has lasted for 7 years in the long run. Based on the perspective of performance and assets, it is impossible to judge that these companies are in a downward stage in the short term, but from the perspective of allocation, they may be good assets, which is why the performance of such assets has been relatively strong in the past two years. From a cyclical and economic perspective, we will pay more attention to post-cyclical sectors such as development and services, at which stage resource companies make money, and they will inevitably increase development and services in capital expenditures and suppliers.
The middle and lower reaches of cyclical products are more oriented to the manufacturing industry, and in 2021, it has experienced a large boom cycle, with obvious expansion and a certain amount of time for reversal. This type of company is at the bottom of the product price, industry expectations, and the company's stock price, so there will often be a chance to rebound at the bottom, what we need to do is to find the real supply of limited and industry reversal varieties, such as the refrigerant industry. In addition, the aquaculture sector has also continued to contract over the past few years and may be profitable in the process of rising prices. However, there are also some industries, although there is no expansion in the next two years, if the expansion in the past 3 or 5 years is relatively large, this kind of industry actually needs a long time to digest production capacity, so the middle and downstream cyclical products need to be more clear about the contradiction between supply and demand.
With regard to the automotive industry, we expect a steady increase in total volume, but there will be a big change in the structure, and this year is still a year for domestically produced cars to expand their market share, and we are most concerned about companies that continue to increase their market share, continue to increase their sales, and enter the product cycle. At present, auto parts have entered the knockout round, and high-quality companies are becoming more and more clear, and we believe that this industry has the hope of giving birth to large-capitalization companies.
In addition, we pay more attention to industries and companies that reflect the advantages of China's manufacturing industry and have the ability to go overseas, including companies in shipbuilding, forklifts, electricity meters, medical equipment and other industries. Most of these companies can reflect the advantages of China's manufacturing industry, and at the same time, the supply-side structure has also continued to be optimized, and the market share has been increasing.
Recently, everyone has paid more attention to the dividend strategy, and in the long term, I think the dividend strategy is effective, but it is also essentially an investment pricing method, similar to growth stock investment and cyclical stock investment, investors need to match their own risk and return requirements to choose, I think the core of investment is still to improve their own pricing power, rather than investment paradigm.
Investment will inevitably experience twists and turns, rankings, performance and scale are the result of a short cycle, and more importantly, the long cycle process itself. It takes time to prove the mutual recognition and recognition between investors and holders. I hope to continue to improve on the road of investment and move forward together with partners that I truly recognize.
Dividend investing in the era of low interest rates
Fan Jingwei, fund manager of the stable income investment department of Penghua Fund
The new trend of the "three lows" macro environment
In the past two years, both bond and equity investment have encountered great challenges.
From the perspective of the bond market, the yield to maturity of 10-year Treasury bonds of 2.5% has always been a support level, whether it is the 2008 financial crisis, the overcapacity in 2015-2016, or the new crown epidemic in 2020, it is ultimately a counter-cyclical policy force to reverse the trend of interest rates. However, the yield on 10-year Treasury bonds to maturity in 2024 has basically broken through the support level of 2.5% and is now at 2.3%, and the trade has entered no man's land.
From the perspective of the stock market, the two-standard deviation of the stock return spread has always been an important indicator for analyzing the price performance of stocks and bonds, but since last year, this indicator has begun to fail. Exploring the reasons behind this, we believe that with the increase in economic volume, the decline in the potential growth rate of the economy is one of the main reasons, but more importantly, the upper-level policy consideration period has shifted from the GDP target to the dilution of economic aggregates, the adjustment of economic structure, and the pursuit of high-quality development. Under the idea of high-quality development, risk prevention and structural adjustment have become the top priorities. In such a policy environment, we believe that the probability of strong stimulus policies as a whole is decreasing, and the cyclical nature of the economy and industries will be significantly weakened.
At the same time, we are currently in a downward cycle of real estate, and if there is no adjustment of counter-cyclical policies, it is difficult to rely on the manufacturing industry to hold up the cycle. Therefore, historical data shows that China's inventory cycle is the real estate cycle. If China is in a period of transition and enters the stage of deleveraging in the next few years, the inventory cycle will be significantly weakened, and at the same time, the motivation of households and enterprises to actively increase leverage will be weak, and the central government is also tightening fiscal discipline and strictly controlling local debt, we believe that the economy may be in a stage of low growth and inelasticity for a long time, and the cyclical nature will be significantly weakened.
It's time to invest in dividends
This leads us to think about what changes need to occur in the investment strategy if we are in the "three lows" macro environment of low interest rates, low growth and low inflation in the future.
Referring to Japan's historical experience, since the 90s of the last century, Japan's economic growth began to decline, residents entered a long period of deleveraging, due to the lack of effective demand, the overall price is also very low, and interest rates have started a bull market. After the 90s, due to a series of problems such as economic growth shifts, liquidity traps and asset price bubbles, Japan's stock market risk appetite has obviously shifted to stocks that focus on ROE, cash flow and higher dividend yields. Therefore, from the 90s to 2012, Japan's high dividend index was dominant for a long time.
On the other hand, in China, if the time dimension is extended, the domestic dividend index has shown a good compound interest return even in the period of rapid economic growth, and since 2005, the CSI dividend return has far outperformed the medium and long-term pure bond index. Therefore, dividend investment is not a unique investment concept in this era, but the performance in the past two years has been excellent, and the advantages have been amplified by the market.
Another question of concern is whether the dividend index is currently in a bubble after three consecutive years of outperformance, and the dividend static dividend yield and the ratio to the 10-year Treasury bond are still at an all-time high, so we do not believe that there is a bubble overall.
Introducing dynamic dividend yields and upgrading dividend investments
In fact, constructing a dividend strategy based on a static dividend rate will face two problems: first, a high dividend yield does not mean that it is willing to pay dividends, it may simply be because the valuation is cheap, and second, high dividends in the past do not mean that they will be sustainable in the future. Therefore, there are two "pitfalls" to avoid when choosing a high dividend: 1) the undervaluation trap (low valuations and low dividend yields), and 2) the cyclical trap (high fluctuations in earnings/cash flows that cause dividends to fluctuate cyclically). For example, the allocation ratio of traditional dividend indices in strong cyclical industries (coal, steel, real estate) is maintained at about 30%, and the downward cycle will bring about a systematic correction in earnings and valuations, and the losses caused by dividend yields are far from being compensated for.
Therefore, when we invest in dividend yields, we consider two factors. First, the static dividend yield level can obtain dividends steadily, which is related to the unique business models of some industries and companies, which have a certain period of immunity, and at the same time have stable valuations, earnings and dividends.
Second, the concept of dynamic dividend yield is introduced, because the current static dividend yield of some companies in the market is not high, but after the subsequent big cycle, the pattern will slowly stabilize, and the pricing will gradually switch from growth to dividend yield. On the whole, the overall dividend payout ratio of A-shares is relatively low, and there is still a large gap between the continuity of dividends and the growth dimension of dividends. Because although the domestic economy is slowing down, it is still a growing economy as a whole, and the growth of listed companies is mainly used for investment expansion, and the willingness and ability to pay dividends are still different from those of developed countries. At the same time, since last year, the regulator has also been guiding listed companies to continue to pay dividends and increase the dividend ratio. In the future, with the economic slowdown and the decline in capital expenditure, the sustainability and growth rate of dividends of A-shares will usher in greater space. Therefore, the targets selected based on the dynamic dividend yield can contribute not only the dividend yield yield income of a steady state, but also the income of valuation improvement.
Based on the above analysis and thinking, we have re-arranged the product of Penghua Hongyi, positioned as an investment strategy of dividend enhancement and cyclical immunity, and selected industries and individual stocks with stable valuation, profitability and dividends. Welcome friends who are interested in dividend investment to pay more attention!
Only the mirror lake in front of the door, the spring breeze does not change the old waves
Zhang Junxiao, head of the total cycle team of the research department of Penghua Fund
Domestic: The spring breeze does not change the old waves
Since the beginning of the year, the domestic economy can be described as "the spring breeze does not change the old waves", on the surface there are signs of improvement or stabilization, but they are all related to "price for volume", to a certain extent, the inertia has continued.
At the same time, the policy side is making efforts, and the willingness to care for the capital market has been significantly enhanced. The keywords of the just-concluded two sessions are "new quality productivity", the "one strong and one strict" of the China Securities Regulatory Commission, and the "one rise and one fall" of the HKMA, all of which focus on Chinese modernization and structure. Specifically, the "new quality productivity" proposed by the HKMA emphasizes "one rise and one decrease": the increase is to improve the quality and efficiency of the service economy, and the decrease is to promote the reduction of comprehensive financing costs, which mainly includes three aspects: 1. serving new quality productivity, 2. serving effective demand, and 3. serving people's livelihood protection. The China Securities Regulatory Commission (CSRC) has emphasized the need to strengthen the foundation and strict supervision and management, which is a relatively big change in the current policy cycle. In addition, the ministerial channel of the China Securities Regulatory Commission and several documents have focused on open source and throttling, the so-called open source is to increase the money that comes in, and throttling is to reduce IPOs and limit the reduction of holdings, so this year's micro liquidity is much better than in the past few years.
From a macro point of view, the pace of the financial beginning of the year is slow, and the follow-up will pay attention to the actual implementation. The future is a policy test period, and this test period window will continue until the second quarter. On the real estate side, after the Spring Festival, it is often a small spring in real estate, so the second-hand housing market in various places has performed well, but the new housing market has not improved, and the price of the second-hand housing market has been declining, showing a trend of exchanging price for volume. Consumption is the bright spot, the total consumption of the Spring Festival has recovered more than expected, and the number of trips and tourism has risen sharply, but the overall customer unit price is weak. The start of construction is in line with expectations and is proceeding in an orderly manner.
Overseas: Inflation is back in focus
In the past two to three years, overseas economic expectations have been an important variable, because the domestic economy as a whole is flat, interest rates are constantly low, but overseas interest rate volatility and inflation volatility are increasing, and we believe that the current resilience of the US economy and inflation has exceeded market expectations.
The real sector boom and financial conditions (interest rates) are still in a constant tug-of-war, and the Fed will gradually enter a cycle of interest rate cuts, but the magnitude or timing of the rate cut cycle will be slow. The overall risks to the U.S. economy are concentrated in the highly vulnerable commercial real estate sector and small and medium-sized banks, and the resilience of inflation in the U.S. cannot be underestimated due to years of continuous deleveraging.
In addition, it is worth noting that this year is an election year, and more than 70% of the world's economy will be elected, the most important of which is the US election. At present, Trump's approval rating is far ahead, and if he succeeds in taking office, it could have two effects: first, it will exacerbate the risk of a secondary inflation rise, and second, there is a risk that trade protectionism will re-emerge, but the actual effect will not be seen until next year.
Against the backdrop of the continued resilience of the U.S. economy and sectors, the Fed's short-term focus has returned to inflation. In fact, Fed expectations have fluctuated sharply, having traded easing expectations in the fourth quarter of last year, which began to swing back at the beginning of this year, trading tightening expectations, and recently began to swing again with the end of the Fed meeting. In general, inflation and economic and financial risks are the impossible triangle facing the Fed, and the current overseas is still in a state of high volatility, and the risk of secondary inflation in the second half of the year is greater.
The domestic macro inertia continues, and the next one to two months or even a quarter may be a test period for policies. Overseas has entered the last mile of disinflation, but this kilometer is not easy, and the tug of war between inflation, real and financial will continue repeatedly.
Take the dividend ballast stone and tap the new trend of supply and demand
Since the beginning of the year, liquidity shocks have covered various sectors, with some risks triggered by market declines and some actively triggered, such as snowballs, but in any case, short-term liquidity shocks have receded.
Secondly, there is the issue of valuation, which mainly includes two aspects: cost performance and structure. On the whole, the market valuation in 2022 has reached a historical extreme, but structurally in the past two to three years, the differentiation between industries and individual stocks is high. After this wave of shocks at the beginning of this year, both the distribution of valuation structure and the differentiation of valuations between industries have returned to a low level, and the beginning of 2024 is the time point when the valuation of A-shares is close to the historical extreme.
In addition, the value of long-term allocation to A-shares is emerging, but this has little to do with the growth and earnings rise of A-shares. The ratio of A-share market capitalization to GDP has not fallen in the past few years, but valuations have continued to decline over the past decade, due to the high number of IPOs and additional issuances.
Recently, the situation is developing in a good direction, with the promotion of the policy of opening up sources and reducing expenditure in the capital market, as well as the encouragement of dividends under the guidance of the China Securities Regulatory Commission, and the scale of dividends has exceeded the scale of financing in the past year.
The above are the changes we have encountered in the past year, and from the perspective of long-term money allocation, this means that the attractiveness of A-shares is really rising. From the perspective of capital, there are many variables in the short term, such as the entry of stable funds and the continuous entry of absolute return funds at the bottom, but in the medium and long term, long money and absolute return funds are the main potential increments in the market.
At present, the long-term funds represented by insurance funds and the absolute return funds represented by private equity and wealth management still continue to have the ability and willingness to enter the market.
In fact, after the liquidity shock was lifted at the beginning of the year, we reviewed the typical post-liquidity shock pattern in the market. In general, after the liquidity shock is lifted, there will always be a rebound dominated by overfalls, and the reversal effect is obvious, and the stage that fell more in the early stage rose more. Moreover, the rebound can be roughly divided into two categories: one is driven by macro or industrial prosperity, such as the New Year's Eve stage in the second quarter of 2022 and early 2023. The other type is pure valuation repair, which is basically piled up with the previous decline, and the level is smaller. In the medium term, if the horizon is extended to a quarter, half a year, or a year, the importance of quality factors and performance will slowly return.
In general, the liquidity shock will experience a much lower and much higher recovery and rebound in the short term, and in the long run, the dividend factor will return to a strong position, and the quality factor represented by ROE will occupy a leading position.
Market statistics show that in the past one to three years, the market center of gravity has been distributed at two ends, one is the low large-cap value associated with high dividends, and the other is the small-cap related to high-volatility and high-valuation growth themes. In the medium term, if the effectiveness of fundamental pricing returns, the typical dumbbell-shaped structure of the past still exists, which is our combing of the law of fundamental pricing regression in the medium term.
Returning to the style level, dynamic dividend research is the focus of active equity in the future, why is it the first choice for bottom position allocation in the current macro environment? Overall, the fundamental conditions for dividend dominance have not changed, and the interest rate pivot has shifted downward. If the decline in interest rates can lead to an increase in economic growth expectations and risk appetite, it is good for growth, but if the decline in interest rates does not lead to economic growth and a rebound in the industrial boom trend, it is good for dividend cash flow assets. At present, the trend of interest rates has not changed, and the fundamental conditions that are relatively lacking in the economic trend still exist.
The data shows that the ratio of CSI dividend yield to long-term interest rate is still high, and the absolute valuation and relative valuation are also high. However, the current focus of institutional allocation is still in the direction of traditional heavy stocks, and there is still a lot of room for institutional holdings, but there is a risk of staged trading congestion, and it may still be the first choice for bottom position allocation in the medium term.
In the past few years, the strongest performance is the small and micro caps, followed by the small caps represented by the CSI 2000, but there is no fundamental support behind the continuous rise in the relative returns of the lower and micro caps in the past few years. After the economic cycle declines in 2021, it stands to reason that large-capitalization companies will be more stable, but in fact, small-capitalization companies continue to rise, and the continued outperformance of such factors is inseparable from the development of quantitative private equity. Since 2021, the excess return of quantitative private placement relative to public active equity has been rising, and the scale of relay public offering has begun to expand. At the same time, the increase in the scale of quantitative private placement is very consistent with the increase in the excess return of CSI 2000 compared with CSI 300, so the layout of quantitative private placement for small and micro caps in the past few years has been relatively concentrated.
If you look backwards, from the perspective of fundamentals to dig out the support target, small and micro disks can also be considered, but in the past few years, small and micro disks have risen and fallen together, with the big changes in regulatory thinking and the rise of market volatility, there may be a risk of negative feedback on redemption in the future, so it is recommended to avoid small and micro stocks that lack fundamental support.
The idea of industry allocation basically follows the fundamental trend of the industry. From a fundamental point of view, according to the logic of splitting, one is to focus on industrial trends to explore new opportunities, there are still some industrial cycles that have not yet been completed, the second is the upstream and downstream industrial chain corresponding to the inflection point of the independent business cycle, the third is to hedge the uncertainty of the demand side with high confidence on the supply side, and the fourth is to focus on the stocks with long-term barriers to increase in pro-cyclical conditions.
From a bottom-up perspective, there are the following directions worth paying attention to: first, it is a stable cash flow, monopoly capacity barriers and dividend assets that meet the future dynamic high dividends; second, it is the precious metals and non-ferrous metals that may be hedged by uncertainty in the process of global pricing and dollar easing; third, since the beginning of this year, the domestic macro upward momentum is less, and it is currently in a flat state, and the return of the global manufacturing boom in external demand is a very important upward catalyst this year, and the overseas and export industry chain is also the main source of opportunities.
The risk warning is as follows
Dear Investors,
Investment is risky and should be cautious. A publicly offered securities investment fund (hereinafter referred to as a "fund") is a long-term investment tool, and its main function is to diversify investments and reduce the individual risks brought about by investing in a single security. Unlike financial instruments such as bank savings that can provide fixed income expectations, when you buy fund products, you may not only share the income generated by the fund's investment according to your holdings, but also bear the losses caused by the fund's investment.
Before you make an investment decision, please carefully read the fund contract, fund prospectus and fund product key facts statement and other product legal documents and this risk disclosure, fully understand the risk-return characteristics and product characteristics of the fund, carefully consider the various risk factors existing in the fund, and fully consider your own risk tolerance according to your own investment objectives, investment period, investment experience, asset status and other factors, and make rational judgment and prudent investment decisions on the basis of understanding the product situation and sales suitability opinions. In accordance with relevant laws and regulations, the fund manager Penghua Fund Management Co., Ltd. and the relevant sales agencies of the fund make the following risk disclosures: 1. According to the different investment objects, the fund is divided into different types such as stock funds, mixed funds, bond funds, money market funds, funds of funds, commodity funds, etc., and you will get different income expectations for investing in different types of funds, and the greater the risks you will bear. 2. The fund may face various risks in the process of investment and operation, including market risks, as well as the fund's own management risks, technical risks and compliance risks. Huge redemption risk is a risk unique to open-end funds, that is, when the net redemption application of a single open-day fund exceeds a certain percentage of the total fund shares (10% for open-end funds, 20% for regular open-ended funds, except for special products specified by the China Securities Regulatory Commission), you may not be able to redeem all the fund shares applied for in a timely manner, or the payment of your redemption may be delayed. 3. You should fully understand the difference between regular fixed investment and lump sum deposit and withdrawal of funds. Regular investment is a simple and easy investment method to guide investors to make long-term investment and average investment costs, but it cannot avoid the inherent risks of fund investment, cannot guarantee investors to obtain returns, and is not an equivalent financial management method to replace savings. IV. Risk Disclosure of Special Types of Products:1. If the product you purchase is a pension target fund, the name of the product "pension" does not represent income protection or any other form of income commitment, and the product is not principal-protected and may cause losses. Please read the specific risk disclosure carefully to confirm the product features. 2. If the product you purchase is a money market fund, the purchase of a money market fund does not mean that the funds are deposited in a bank or depository financial institution as a deposit, and the fund manager does not guarantee that the fund will be profitable, nor does it guarantee a minimum return. Please read the "Risk Disclosure" section of the fund's prospectus carefully to confirm that you understand the specific risks of money market funds. 3. If the product you purchase is a fund of funds, and the product mainly invests in publicly offered securities investment funds, which has similar risk-return characteristics to the underlying fund, if the product adopts an absolute return strategy and adopts a performance benchmark of absolute return, the performance benchmark of the fund is the return target that the fund strives to achieve, and does not mean that the fund will necessarily achieve the performance benchmark return. Please read the specific risk disclosure carefully to confirm the product features. 4. If the product you purchase is a fund managed by the manager, and the fund manager divides the fund assets into two or more asset units, and entrusts two or more third-party asset management institutions to act as investment advisers to provide investment advice for specific asset units, the investment in the product needs to bear the specific risks brought about by the entrusted investment adviser, such as the risk that the investment adviser does not provide investment advice as agreed, and the risk that the investment adviser no longer meets the employment conditions and needs to be changed. Please read the specific risk disclosure carefully to confirm the product features. 5. If the product you purchase is an index fund and the product passively tracks the underlying index, you need to bear the specific risks of indexed investment, including the risk of deviation between the return of the underlying index and the average return of the stock market, the risk of fluctuation of the underlying index, the risk of deviation between the return of the fund portfolio and the return of the underlying index, and the risk of change in the underlying index. If the index fund you buy is an index-enhanced fund, the fund can implement an index-enhanced investment strategy, that is, optimize and adjust on the basis of passively tracking the index, in order to obtain an investment return that exceeds the index, but there is still some uncertainty in the implementation results of the index enhancement strategy, and its investment return may be higher than the index return but may be lower than the index return. If the product you purchase is an exchange-traded index fund, in addition to the specific risks of the above-mentioned index funds, you may also face the risk of discount and premium of the secondary market trading price of fund shares, the risk of incorrect decision-making and IOPV calculation of fund shares, the risk of fund delisting, the risk of failure of investors' subscription and redemption, the risk of realisation of the redemption consideration of fund shares, and the risk of third-party service providers. Please read the "Risk Disclosure" section of the fund's prospectus carefully to confirm that you understand the specific risks of indexed investments. 6. If the products you purchase invest in overseas securities, in addition to the general investment risks such as market fluctuation risks similar to those of domestic securities investment funds, the funds are also subject to special investment risks faced by overseas securities market investments, such as exchange rate risks. If you purchase a product that invests in stocks in the Hong Kong market through the Mainland-Hong Kong Stock Connect ("Southbound Mechanism"), you will also be exposed to the unique risks brought about by the differences in the investment environment, investment targets, market systems and trading rules under the Southbound Mechanism, including the risk of large fluctuations in the stock price of the Hong Kong stock market (the Hong Kong stock market implements T+0 rotation trading and there is no limit on the rise and fall of individual stocks, which may exacerbate the volatility of the stock price), The risks that may be brought about by the inconsistency of trading days under the Hong Kong Stock Connect mechanism (when the mainland market is open and Hong Kong is closed, Hong Kong stocks cannot be traded normally, and Hong Kong stocks cannot be sold in time, which may bring certain liquidity risks). Please read the "Risk Disclosure" section of the fund's prospectus carefully to confirm that you understand the specific risks associated with investing in overseas securities markets. 7. If the product you purchased operates in a regular open mode, or after a period of closed operation, it becomes an open-ended operation, or the fund contract stipulates a minimum holding period for fund shares, and it is not listed for trading during the closed period or minimum holding period, you will face liquidity constraints due to the inability to redeem, convert or sell fund shares during the closed period or minimum holding period. Please read the "Subscription and Redemption of Fund Shares" and "Risk Disclosure" sections of the prospectus carefully to confirm that you understand the liquidity constraints caused by the operation of the fund. 8. If the product you purchased has an automatic termination clause in the fund contract, if the number of fund unit holders is less than 200 or the net asset value of the fund is less than RMB 50 million for several consecutive working days, the fund manager shall terminate the fund contract without holding a large meeting of fund unit holders, and you may face the risk of automatic termination of the fund contract after you purchase the fund. Please read the "Risk Disclosure" section of the prospectus carefully to confirm that you understand the specific risks associated with the automatic termination of the fund contract. 9. If the product you purchased stipulates the terms of suspension of the operation of the fund, that is, when the fund contract is agreed, the fund manager may decide to suspend the operation of the fund, and during the suspension of the operation of the fund, the fund manager and the fund custodian may decide to terminate the fund contract after consultation between the fund manager and the fund custodian, and report to the China Securities Regulatory Commission for filing and announcement, without the need to convene a general meeting of fund unit holders. After you purchase the fund, you may face the risk that the operation of the fund will be suspended until the termination of the fund contract. Please read the "Effectiveness of the Fund Contract" and "Risk Disclosure" sections of the prospectus carefully to confirm that you understand the specific risks of the suspension of the operation of the fund. 10. If the product you purchased is an initiator fund, if the net asset value of the fund is less than RMB200 million on the three-year corresponding date of the effective date of the fund contract, the fund contract will be automatically terminated, so you may face the risk of automatic termination of the fund contract after you purchase the fund. Initiator fund refers to the fund manager using the company's shareholders' funds, the company's inherent funds, the company's senior management personnel or fund managers' funds to subscribe for the fund in an amount of not less than RMB 10 million, and the holding period is not less than three years. Please carefully read the "Effectiveness of Fund Contract" and "Risk Disclosure" sections of the prospectus to confirm that you understand the specific risks of automatic termination of the fund contract. 5. The fund manager undertakes to manage and use the fund assets in good faith, diligence and responsibility, but does not guarantee that the fund will be profitable, nor does it guarantee the minimum return. Past performance of the Fund and its net worth are not indicative of its future performance, and the performance of other funds managed by the Fund Manager does not constitute a guarantee of the performance of the Fund. The fund manager, Penghua Fund Management Co., Ltd., and the relevant sales agencies of the fund remind you of the principle of "buyer's responsibility" in fund investment, and that after making an investment decision, the investment risks caused by changes in the operation status of the fund and the net value of the fund shall be borne by you. Fund managers, fund custodians, fund distribution agencies and related institutions do not make any promises or guarantees for the investment returns of the fund. 6. 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