Market Adjustments Confirm Economic Pressure, Leading + High-Quality Outperform

Market View: In June, the domestic stock market continued to adjust, with the main characteristics being: First, trading volume continued to shrink, and the sentiment of various market investors was low; Second, most sectors with high economic relevance fell, reflecting concerns about increasing economic downward pressure; Third, the difference in style between large and small caps continued to widen, with the A50 index falling only 0.4% in June, while the CSI 1000 and CSI 2000 indices fell by more than 8% in June.

The downward pressure on China's economy has not decreased, and various macro and meso indicators in May-June all point to macro pressure.

The batch price of Moutai liquor is the most core (the most resilient) indicator of China's economic business activities, which has been falling continuously since Q2, reflecting the continuous contraction of business activities.

In summary, the continuous downward trend of the economy has become a "market consensus", with the 30-year government bond yield falling below 2.5%, and the 10-year government bond yield falling below 2.3% - for comparison, the average 30-year government bond in the Eurozone is 2.6%, and Japan's 30-year government bond is about 2.2%.

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If the 30-year government bond yield reflects the outlook for economic growth and inflation over a 30-year period, where we are now, between Japan and the Eurozone, is it reasonable or pessimistic or could it be lower?

It should be noted that both the Eurozone and Japan have gone through multiple rounds of QE, and their populations have been aging for more than 20 years, with economic growth hovering in the 1-2% range.

Our research on interest rate levels is not very professional, but we start from common sense and propose some perspectives for thought.

From actual micro evidence, there are not without bright spots: First, the sales volume of pure infrastructure-related products is still good, such as construction machinery used for farmland water conservancy (small excavators, etc.).

Second, the sale of second-hand houses in Beijing, Shanghai, Guangzhou, and Shenzhen has been continuously improving since the new policy in May, and the duration has exceeded the previous 23 years in August-September.

Third, the RMB exchange rate has depreciated along with the yen, and there may be pressure on foreign capital outflows in the short term, but in the medium term, currency depreciation is a good way to release economic pressure and asset price adjustment pressure, which is helpful for the future economic improvement.

Judging the accuracy of short-term economic figures is poor, and it is not very helpful for long-term stock investment.

Our medium-term view on the economy is a "weak recovery of the L-shaped", where the economy releases historical accumulated risks (real estate, local debt) during the adjustment process, while the proportion of high-end manufacturing and technology industries in exports continues to rise.

Looking at the central fiscal debt ratio and the high savings rate of residents, there is a lot of potential stimulus space in the domestic economy, and the policy options now are "consolidating the foundation and cultivating the essence" and "prescribing the right medicine", and it is expected and feasible to choose "Shiquan Dabu Pill" in the future.

The leading and high-quality characteristics of the capital market are clear, and we expect it to continue to deepen.

China's capital market is in line with the characteristics of mature capital markets, and in the future, the stocks of leading enterprises, high-quality operating enterprises, and enterprises that value shareholder returns will be the core of investment stock selection.

Our stock selection framework, on the one hand, looks at industry prosperity, data changes, policy guidance, and technological evolution; on the other hand, it starts from the essence of the business, looking at the competitive pattern, shareholder returns, and valuation attractiveness.

This issue's discussion focuses on the end-side application of AI.

Apple's entry has greatly promoted the popularization of AI applications on the end side (mobile phones + PCs).

The AI applications that can be expected to be implemented in the second half of the year include: 1.

Starting from the iPhone 16, AI-assisted functions will enable hundreds of millions of users of Apple mobile phones, PCs, and Pads to use them.

2.

Other mobile phone manufacturers (Android, HarmonyOS) are likely to follow suit and launch similar functions in new mobile phone products in 24-25 years.

The application of AI on the end side is expected to be a major outbreak of AI applications on the 2C side.

Previously, Microsoft has launched AI functions on the software side through AI + transformation of Office, Windows, etc., but it is still too far from ordinary consumers.

Smart phones are the most popular consumer electronic products in the world, and what is attached to smart phones is the mobile Internet (the most popular application ecosystem), and AI + smart phones are AI + mobile Internet.

The first wave of impact of AI + smart phones is mainly reflected in the renewal and replacement of hardware products.

From the iPhone X (10) to the iPhone 15, the renewal and replacement cycle of smart phones has obviously decreased, because the technology of the products themselves has been slow to update - similar to the history of televisions and computers, consumers have extended the service life of smart phones and reduced the update frequency, which is bad news for the hardware industry.

After AI +, if the consumer experience has a qualitative change (which needs to be verified, but the probability is high), and the experience of AI mobile phones is far ahead of ordinary smart phones, then the renewal and replacement of hardware will be the first wave of benefits.

AI + mobile Internet will bring the second wave of technological waves starting from 2025 (or later).

When 2025 starts, hundreds of millions of users will start to update to AI mobile phones (whether iOS or Android, HarmonyOS), similar to the mobile Internet at that time, based on mobile phones, a series of new applications such as WeChat, takeout, maps, mobile games, etc.

have been developed, and now based on AI capabilities, software and Internet companies can develop many new applications.

A bit more troublesome than hardware is that the AIization of App applications will have both beneficiaries (users like it more after +AI) and significant losses (replaced by AI +).

The outbreak of AI end-side applications will bring significant benefits to the field and potential losses to the industry, but it will help improve the overall efficiency of society.

At the same time, from the perspective of industrial chain advantages, after the maturity of AI large models, the rise of AI end-side applications, China's consumer electronics manufacturing industry chain and Internet application industry chain have a global comparative advantage.