Li Yu, CIO of Gaoteng International Equity: In the restorative market of China's stock market, Nuggets undervalued high-performing stocks

China Fund News reporter Guo Minjun

In a complex international environment, what is China's economic prospects? Can China's restorative market continue? How can investors capitalize on current investment opportunities? And which "gray rhinoceros" or "black swans" should we watch out for? In this regard, a reporter from China Fund News interviewed Li Yu, CIO of Gaoteng International Equity.

China's economy is cautiously optimistic

China Fund News: What are the highlights of the recent economic data?

Li Yu: Although the data released recently is generally weak, there are also bright spots.

First, China's GDP is generally stable, and corporate debt ratios have declined. Despite the significant decline in real estate investment and sales, China's GDP grew by 5.3% year-on-year in the first quarter of this year, according to the National Bureau of Statistics, reflecting the country's declining dependence on real estate and debt expansion.

Secondly, although the total export volume has not changed much, the structure has been optimized, the proportion of low value-added products has declined rapidly, and the proportion of high value-added products such as automobiles and machinery has increased significantly. This gives us more confidence in China's economic growth.

In addition, the international competitiveness of Chinese enterprises continues to increase. On the one hand, in the past two years, domestic prices have remained stable amid high inflation abroad, which gives Chinese goods a great price advantage. Not only that, the design and process of "Made in China" have also been rapidly improved. For example, five years ago, if you wanted to buy a car of more than 400,000 yuan, international brands were almost the only choice, and now many consumers prefer to choose domestic electric vehicles.

China Fund News: What is your outlook for China's economic prospects?

Li Yu: I'm cautiously optimistic. It is true that China's economy is facing many difficulties, such as a downturn in the real estate market, growing trade tensions, and restrictions on export markets and technology sources. These headwinds will also exist in the coming years. But I am more optimistic about China's economy than overseas market players.

China's stock market recovery will continue

China Fund News: Will China's year-to-date restorative market continue?

Li Yu: There will definitely be twists and turns in the middle, but China's stock market will continue to improve in the next 1-2 years.

On the one hand, overseas investors have been reducing their allocations to Chinese equities over the past few years, and their holdings are now even lower than they were when they plummeted at the end of 2022. Although some hot money has been increasing its position recently, it is still very cautious, which is a good thing from a gambling point of view.

More importantly, according to Wind information, the net outflow of funds brought about by IPOs, additional issuances and reductions in the A-share and Hong Kong stock markets this year has decreased by 70%-80% compared with previous years. According to the data of the central bank, excess savings have soared by tens of trillions of yuan in the past few years, and the yield on wealth management has remained at a very low level of about 2%. Once the market recovers for more than half a year, it will attract a lot of funds with a high risk-return appetite to flow into the stock market.

In addition, the government and relevant regulatory authorities have recently introduced a series of measures aimed at improving the quality of listed companies and enhancing long-term shareholder returns. These factors will attract long-term inflows.

China Fund News: At present, what industries or investment themes are you optimistic about investing in China?

Li Yu: First of all, I am more optimistic about state-owned enterprise stocks. SASAC has written cash flow, ROE and other indicators into the assessment of central enterprises, in order to further reflect the ability of enterprises to create value for shareholders. Given that the current valuation of SOE stocks is still very low, if indicators such as cash flow and return on equity continue to improve, SOE stocks are likely to continue to perform well.

The pharmaceutical sector is also worth looking forward to. Pharmaceutical stocks have been tumbling for three years, and the impact of centralized procurement and anti-corruption has been largely reflected. With the acceleration of the aging of the Chinese population, the long-term prospects of the pharmaceutical industry have not changed. Among them, we are particularly optimistic about the Chinese medicine industry, because traditional Chinese medicine is different from Western medicine, which does not need to go through multiple clinical trials, saving huge research and development costs. Referring to Japan, which is also facing an aging population, the healthcare sector is relatively strong and is one of the best performing sectors among Japanese stocks, despite the downturn in Japanese stocks over the past few decades.

We are also bullish on the manufacturing sector. According to Wind Information, the 2023 annual reports of some manufacturing companies show that their overseas markets have achieved 50%-100% growth. Such rapid growth in a mature market reflects the rapid improvement in the competitiveness of China's manufacturing industry. And these companies are still very cheap at the moment. At the same time, China is actively promoting the upgrading of the equipment manufacturing industry, which will also bring about the growth of related demand.

China Fund News: You once said that you prefer Hong Kong stocks over A-shares, what is the reason?

Li Yu: Because the valuation of Hong Kong stocks is much lower than that of A-shares, according to Wind Information, the price of A-shares of some large leading companies is 2-3 times that of Hong Kong stocks.

China Fund News: Artificial intelligence technology seems to have become the most disruptive technology after the Internet, following the "Internet +", "smart +" began to empower thousands of industries. How can investors seize the opportunities? And how to avoid the risks that may exist in the early stage of the development of a new technology?

Li Yu: The core leading enterprises of artificial intelligence are not in the A-share and Hong Kong stock markets, so they don't have to buy relevant domestic listed companies. In every wave of market rally, many other stocks can make money, even if there are no companies that can catch the wind. There is no concept that you have to buy. For things that they don't understand, investors must not follow the trend to speculate on concepts. Blindly chasing the wind, you may occasionally make money, and there is a high probability of losing money in the long run.

Beware of the three "gray rhinos"

China Fund News: What factors in the global economy will have a greater impact on the outlook of China's economy and stock market?

Li Yu: In addition to geopolitical issues such as the US presidential election and the Russia-Ukraine war, the biggest economic impact is the Fed's interest rate trend. If the Fed further delays the rate cut, or even announces an interest rate hike, it will constrain the monetary policy of China and many countries around the world.

In addition, commodity prices will also have a greater impact on China, a major manufacturing country.

China Fund News: What potential "gray rhinoceros" or "black swan" events should investors focus on guarding against?

Li Yu: First, in the next one to two years, the trade war between China and the United States may escalate, and the trade war between China and the EU may also begin. Mr. Trump has said that if he is elected president, he will impose 60 percent tariffs on all Chinese goods when he takes office.

Second, a large bank in China was kicked out of the International Funds Clearing System (SWIFT), which may cause panic in the market.

Third, China's real estate prices and transaction volume have fallen further, putting more pressure on China's financial system.

China Fund News: In the current environment, what advice do you have for investors?

Li Yu: You can pay attention to Hong Kong stock ETFs. Invest in individual stocks to buy companies that you can understand, have relatively low valuations and have real performance.

Editor: Captain

Review: Muyu