Market Despair Meets Tunnel Light

Here is the translation of the provided text into English: "Monthly Investment Perspective: In August, the domestic stock market continued to adjust, with market sentiment continuously declining.

Firstly, trading volume continued to shrink, with the monthly volume of various indices falling to about 50% of the level at the beginning of 2021, reaching a rather extreme state.

Secondly, industries highly correlated with the economy continued to decline, and indeed, the pressure is significant as seen from the mid-year reports.

Thirdly, when compared across markets, the Hang Seng Index and the Hang Seng Tech Index actually saw a slight increase in August, forming a stark contrast with the situation in A-shares.

It seems we are in a "long tunnel."

In the short term, the mid-year 2024 data shows that the overall profits of listed companies have declined year-on-year, and profit margins have fallen, with significant pressure from insufficient demand and intensifying internal competition.

In the medium term, many industries still need time to emerge from deflation, such as real estate and consumer goods, with even the prices of milk and mineral water falling, and in industries like photovoltaic lithium batteries and electric vehicles, product prices have dropped significantly over the past two years.

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In the long term, domestic population pressure, international trade and technical barriers, and geopolitical issues continue to exert sustained pressure on economic development confidence.

In the short term, the capital market is always a "voting machine"; when the market is good, everyone tends to "long-termize short-term prosperity," and when the market is poor, everyone tends to "short-termize grand pessimistic narratives."

In my view, the "dark shockwaves in the tunnel" that we see cannot ignore at least three aspects: (1) Industry development is always cyclical, and leading companies in over-supplied industries begin to decouple from the industry cycle.

One of the advantages of China's industrial development over the past few decades has been the "pursuit of growth."

The oversupply in industries such as steel, coal, aluminum electrolysis, and cement a decade ago is similar to today's situation in photovoltaic, lithium battery, and electric vehicle industries.

The current profit margin dilemma in these severely over-supplied industries is the result of the "big push and quick progress" from 2019 to 2022.

Starting from the second quarter of 2024, we are beginning to see a slowdown in capacity investment and idling of existing capacity in segments such as photovoltaic, lithium batteries, and battery materials.

It is expected that the years 2024-2025 will be a period of "supply-side deleveraging," after which these fields will also usher in a period of "the survivors are the kings," just like the coal and steel industries in recent years – in fact, some areas have already seen this, even though the overall industry pressure is great, the business cycle of leading companies has already turned upward.

(2) The perspective of the capital market is also cyclical, and today's despair is the hope for the future.

If the definition of "high growth" and "high ROE quality" in 2020-21 was to a large extent a "rearview mirror perspective," thereby wrongly giving "extremely high valuations," then the current market's definition of "no growth" and "price deflation" also carries a significant "rearview mirror perspective" – photovoltaic module prices have dropped from about 1.5 yuan/W to 0.8 yuan/W, lithium battery prices have dropped from about 1 yuan/Wh to 0.5 yuan/Wh, including a nearly 30% drop in real estate prices in less than two years, which are not things that can be repeated in the future.

The despair of the current market has brought a combination of "low valuation + high shareholder return + return to growth options" for a batch of high-quality companies, which will be the hope for the market to shine in the future.

(3) The outflow of funds from the stock market is nearing its end, and the scarcity of high-quality companies is more prominent.

The capital market of the past three years has been a typical "reduction" state, from the large outflow of foreign capital from the A-share and Hong Kong stock markets, to the recent hot discussion of the redemption pressure caused by the opening of the "three-year closed-end funds."

But in fact, up to now, passive ETFs have exceeded active funds in the composition of equity funds, and fixed-income funds have also been favored by investors for some time – more than three years later today, seeing these phenomena, what we need is fear or greed?

Before 2010, the Chinese stock market was more of an era of large Beta fluctuations in the economy.

From 2010 to 2020, the Chinese stock market had prominent structural opportunities in industries, with industry Beta far greater than macro fluctuations.

Now, as the Chinese economy continues to slow down, the opportunities for industry Beta have also decreased, and the stock market has entered an era of scarcity of individual high-quality companies.

The Chinese stock market will enter an era that clearly emphasizes shareholder returns for high-quality individual stocks, and the future market's capital flow will definitely go in this direction.

The market has been looking forward to the "light at the end of the tunnel" many times, and it's a bit tired of not loving it.

But objectively analyzing the present, we need to see that there are some changes in both internal and external environments.

Overseas, from the current point of view, the U.S. economy should be in a cooling state (not yet a recession), and in this process, the interest rate environment should be optimized.

In fact, we can also see some positive changes in some assets such as Chinese concept stocks and Hong Kong stocks.

The domestic economy has not seen a significant improvement yet, and it is rational to speculate that the time window for monetary and fiscal policies to stabilize the economy has arrived.

– When comparing domestic and foreign economies, I think we should not belittle ourselves.

The U.S. has a lot of room for monetary policy, but China's fiscal policy also has a lot of room.

Considering the existence of boundary conditions such as the RMB exchange rate and U.S. elections, looking forward to the next 3-6 months, the probability of the situation getting worse is not great.

The market bottom is long and hard to endure, but it also brings a good opportunity for the layout of high-quality growth stocks.

Based on our own stock selection framework, combined with the industry prosperity of growth stocks and the shareholder returns of high-quality companies, we hope to grasp the "strike zone" of high-quality growth stocks before and after the arrival of dawn."