Market Recovers, Gradual Return to Normalcy

Market Insights: In February, the capital market emerged from an extreme liquidity crisis.

First, there was strong intervention by new funds (a necessary measure when the market fails), and second, there has been progress in market system reforms, such as adjustments to the short-selling system and regulatory statements on the medium and long-term construction of the market, which have restored and enhanced investor confidence.

The economic fundamentals in February were neither surprising nor alarming.

The consumption data before and after the Spring Festival were quite good, showing that the consumer market of 1.4 billion people is still the resilience of the economy.

At the same time, the real estate sales data from January to February, and the construction start data after the Spring Festival in February, show China's determination to transform its economy without pursuing short-term numbers.

Domestic monetary and fiscal policies have made some positive responses to the economic downturn at the beginning of the year, such as reserve requirement ratio cuts, LPR adjustments, and equipment renewal policies.

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However, overall, the policy still tends to support rather than stimulate, and does not change the economic pursuit of high-quality development.

Whether the expectation of asset price inflation can be reversed still needs to be observed.

But compared with the real economy, the capital market's emergence from the crisis is a bright spot.

Before the Battle of Midway in May 1942, the U.S. stock market had already bottomed out and rebounded ahead of the turning point in the war.

The capital market crisis in January and February may be an advance reaction to economic pressure.

The capital market's emergence from the crisis and entry into a normal state also indicates that people's current extreme pessimism about the economy will also be corrected in the future.

After the capital market enters a normal state, the current overall market valuation is still at a historically low level, and there are many investment opportunities.

In our view, due to the differences in the funds of participants, the Chinese capital market has already formed a three-tier asset structure: The first layer is low-valuation value assets.

The growth of these assets is generally average every year, but the business model is stable and the cash flow is good.

From the perspective of absolute valuation and international horizontal comparison valuation, they are reasonably low.

It is expected that medium and long-term funds will continue to flow into this layer of assets in the future; The second layer is the classic growth leaders in various Chinese industries.

During the bull market from 2019 to 2021, the "Mao Index and Ning Index" rose a lot and the valuation bubble formed.

However, the valuation bubble has been digested in the past three years, but the current growth confidence of this type of asset is weak and the institutional holdings are concentrated.

It is expected that starting in 2024, this type of asset will produce differentiation, and some growth stock leaders who regain the growth logic will regain the upward momentum; The third layer is the Chinese characteristic "small and medium-sized plate" speculation assets.

On the one hand, historically, due to the fast economic growth and changes in China, many "miracles of the crow turning into a phoenix" have been produced.

On the other hand, due to the participation of retail and quantitative funds, the highest liquidity premium in the world has been given - this layer of assets is still overvalued overall, with large fluctuations, and has no global investment value in the long term.

We believe that the current pricing of the first layer of low-valuation value stocks is relatively reasonable and fair, but there is no significant undervaluation (especially relative to the lead in a few years).

Considering the economic transformation and the downward trend of the interest rate center, the allocation value of this layer of assets in the medium and long term is still prominent.

The second layer of classic growth stocks, the de-bubble of valuation has been completed, and there will still be structural opportunities in the future.

Some are overseas support, some are new industry logic, and some are the opportunities after the "involution" is completed.

The third layer of small and medium-sized plate speculation assets, on the whole, is still a chip trading attribute.

There are definitely some high-quality "pearls in the sea" that are looked at from the bottom up, but it is necessary to be vigilant about the risks brought by large fluctuations in the capital side in 2024.

Industry observation: The core of the current global industrial progress is the progress of the AI industry.

Looking at the industrial progress in the United States, the AI industry has made rapid progress in the past year, and the leading degree has further expanded.

First, the rapid development of AI computing power, the GPU architecture has actually brought a new round of "Moore's Law" scientific and technological progress.

Led by the leading U.S. chip companies, based on the storage and foundries in Japan, South Korea, and Taiwan, and based on the basic users in Europe, America, Japan, and other regions, such an "AI technology globalization" wave has formed, and the intensity of the wave may exceed the Internet wave in the 1990s.

Second, AI applications have begun to become popular.

The financial reports of large U.S. technology companies have shown that AI is rapidly popularizing in improving the production efficiency of the 2B field.

At the same time, the breakthroughs in Sora and other text and video models also indicate that the series of 2C applications such as video and games will not be far away.

Starting in 2024, global AI application investment opportunities will emerge.

The progress of AI in China is still relatively slow, but there is still some progress.

It can be expected that in 2024, domestic models and domestic computing power may catch up with the level of the United States in the first half of 2023.

Since GPT4.0 is a basic application model threshold, the second half of 2024 can expect domestic models to reach the 4.0 foundation and domestic applications to start.

Focus direction: AI, high-end manufacturing, state-owned enterprise reform, and global resource products are the structural directions we are more optimistic about.

The first is AI.

From 2023 to the beginning of 2024, AI computing power is the core, and the world is in the stage of large model training.

Starting in 2024, the investment opportunities of AI computing power and AI applications will be equally important.

The second is high-end manufacturing.

The re-industrialization of the world (outside China) will be an important driving force, and some domestic companies will seize global opportunities.

The third is the reform of state-owned enterprises.

State-owned enterprises and central enterprises will achieve positive market value management by improving profit margins, ROE, and dividend rates.

This will be an important basic clue for many years in the future, which is different from the situation in the past many years.

Therefore, although some dividend stocks are at a higher position from the current position, the opportunities of central enterprises and state-owned enterprise reforms are worth paying attention to in the long term.

The fourth is global resource products.

Global resource products with limited supply and steady demand growth will be a "hard asset" in the A-share market for a long time in the context of the overall economic slowdown.

In addition to the above four directions, we will continue to pay attention to innovative drugs, new hardware of science and technology, robots, and other directions.