Han Tongli stated that compared to the Internet Plus-Related bubble period of 1999-2000, the U.S. stock market still has 30%-40% upward potential, and the U.S. dollar may continue to remain strong. Zhao Qian mentioned that there are profit opportunities in the A-share market next year, as the current valuation of A-shares is not expensive, related policies provide a strong bottom support for the market, and many Chinese companies are expected to perform better next year than this year.
On December 19, the wealth management department of China CITIC Bank held the 2025 Investment Strategy Conference, inviting Zhao Qian, head of investment research from the wealth management department, and Han Tongli, CEO and Chief Investment Officer of Harvest International Asset Management Company, to share views with investors on the trends of US stocks, A-shares, Gold, and Commodities for the upcoming year. The key points are as follows:
- After Trump took office, the US economy will see strong growth in the short term, as all of Trump's policies basically aim at high inflation, such as tariffs imposed externally, tax cuts internally, fiscal expansion, and driving out low-end populations, which may lead to uncontrolled inflation in the USA.
- Currently, nominal salary growth in the USA remains high, and with inflation slowing down, the actual salary growth for Americans began to improve from the second half of 2023, supporting resilient consumption growth in households. Additionally, labor productivity in Europe and Japan is much lower than in the USA, leading the market to expect that the USD will remain strong.
- The USD interest rates only affect the demand side for Gold, with rising rates suppressing speculative demand. On the supply side, past gold supply has remained relatively stable; however, in the future, there may be significant fluctuations in gold supply. Since 2012, the world's top ten gold mining companies have continuously reduced capital expenditures and decreased or ceased substantial income reinvestment in mines, resulting in a notable decrease in gold reserves among global major mining companies and a significant deterioration in the remaining grades of gold mines.
- Compared to the Internet bubble phase of 1999-2000, US companies have stronger profitability, healthier finances, and a significant amount of cash available to support further investment in the AI revolution. US stocks still have a 30%-40% upside potential (in terms of the S&P Index).
There are still profit opportunities in the A-share market: First, the current valuations of A-shares cannot be considered expensive or bubbly; they are at least reasonable, and valuations for some companies may still be low; Second, the speech of the central bank governor on September 24 provided strong support for the market's bottom; Third, many enterprises are expected to perform better next year than this year because the profits of currently listed A-share companies are at the bottom, and next year the domestic PPI may continue to improve.
- Hong Kong stocks are currently very cheap, with valuation multiples only around seven to eight times, less than ten times. Whether the Hong Kong stock market can eventually rise depends on whether liquidity issues can be resolved. The funds in Hong Kong stocks may be affected by global liquidity, meaning the denominator may be influenced by global liquidity, while the numerator may be impacted by the Chinese economy.
- From a global liquidity perspective, if the Federal Reserve's interest rates remain high next year, the valuation expansion space for Hong Kong stocks will be quite limited. Therefore, the driving factors for Hong Kong stocks may depend more on the fundamentals, specifically whether corporate profits can improve and whether listed companies can earn more than before. From this perspective, the analytical logic for Hong Kong stocks and A-shares is quite similar.
Zhao Qian, head of investment research at the Wealth Management Department of China CITIC Bank Corporation, has 13 years of experience in the financial industry, previously working as a trader at a major state-owned bank head office, with long-term in-depth research on global macroeconomics and major assets.
Han Tongli, CEO and Chief Investment Officer of Harvest Global Investments Limited. Han has over 20 years of global market investment experience, covering investments in Bonds, Stocks, CSI Commodity Equity Index, and more. He previously worked as a fund manager at PIMCO's U.S. headquarters, managing hundreds of billions in Emerging Markets bond investments. According to Bloomberg Statistics, the performance of the global bond public fund he managed in Hong Kong ranked first among 126 similar public funds globally during his tenure.
The full text is as follows:
Host:
Dear audience, hello everyone. Welcome to the "New Situation, New Thinking, New Future—2025 Xinjian Investment Strategy Conference" hosted by the Wealth Management Department of China CITIC Bank Corporation. The topic for today’s session is "New Situation—How to view Assets?" I am the host, Ji Zhaoyan, from Wall Street News. In 2024, the global macro economy will face new situations and new variables again.
On one hand, the Federal Reserve has officially started a rate cut pattern, and the economic asset pricing logic is beginning to reshape; the aftermath of the U.S. election has settled, as Trump has overwhelmingly won the presidency, and his political stance may again disrupt the global economic and trade landscape. On the other hand, domestic incremental policies are frequently introduced, economic data is stabilizing and rebounding, and global bullish signals appearing have restored domestic investors' confidence. Looking ahead to 2025, how will domestic and international policies evolve? What new surprises will the capital markets bring? As individual clients, how should we scientifically allocate our asset portfolios? To address these critical questions, we are particularly honored today to invite two guests to provide insights into asset allocation directions for 2025 from a macro perspective.
First, allow me to introduce today's two guests. They are Zhao Qian, head of investment research at the Wealth Management Department of China CITIC Bank Corporation, who has 13 years of experience in the financial industry and previously worked as a trader at a major state-owned bank, with long-term in-depth research on global macroeconomics and major assets. The other guest is Han Tongli, CEO and Chief Investment Officer of Harvest Global Investments Limited, with over 20 years of global market investment experience covering Bonds, Stocks, CSI Commodity Equity Index, etc. He previously worked as a fund manager at PIMCO's U.S. headquarters, managing hundreds of billions in Emerging Markets bond investments. According to Bloomberg Statistics, the performance of the global bond public fund he managed in Hong Kong ranked first among 126 similar public funds globally during his tenure. Welcome to both guests.
The yield on ten-year U.S. Treasury bonds being below 4 is an emotional reaction of the market, characterized by buying high and selling low.
Host:
The first question, we will first focus on the overseas market. We have noted that before and after the U.S. election, the yield on U.S. Treasury bonds has begun to rise, and the yield on ten-year U.S. Treasury bonds has returned above 4.3%. Does this reflect short-term emotional expectations or a reversal in understanding the long-term trajectory of U.S. economic policies? What will be the future trend of U.S. Treasury rates? For this question, we will consult an expert in bonds and fixed income, Mr. Han Tongli, to hear your insights.
Han Tongli:
Well, thank you, Host. In fact, since the past two years, my assessment of U.S. Treasury yields has been contrary to mainstream market expectations. It turns out that mainstream expectations have consistently been wrong. Why? On one hand, the U.S. economy has been very strong; there may be some signs of weakness recently, but there will likely still be strong growth in the short term after Trump took office. I do not believe the rise in U.S. Treasury yields is an emotional reaction of the market; on the contrary, I believe that the previous yield being below 4 was indeed the emotional reaction of the market, buying high and selling low. Because yields reflect the capital return rate, which embodies the capital return rate of economic development. With the U.S. economy performing strongly, Trump's presidency has prolonged the bull market. At the same time, all of Trump's policies broadly target high inflation, such as imposing tariffs on China, cutting taxes domestically, fiscal expansion, and immigration policies that expel low-level populations, which will all lead to inflation. If the Russia-Ukraine war stops, reconstruction will also contribute to inflation, and global energy supplies will be greatly affected by Trump-related policies, which also points to high oil prices.
Among all of Trump's domestic and foreign policies, the only factor that might counter inflation is his pragmatic inclination. He dismisses ESG as nonsense and does not believe in it. Therefore, after his election, U.S. oil and energy production companies have relaxed oil extraction restrictions.
As a result, U.S. shale oil supply and oil & gas supply will increase, which may counteract part of the inflation, but it is not enough to offset the upward pressure on oil prices caused by turmoil in the Middle East. Overall, after Trump took office, inflation is indeed likely to get out of control.
However, there is a positive side now. The treasury secretary he appointed is Scott Bensent, who is a veteran of Wall Street, coming from the hedge fund industry, and has profound insights into the essence of the economy and the market. His appointment has alleviated the market's concerns about inflation under Trump's administration. This is also why, after Trump took office, U.S. Treasury yields first rose significantly, breaking 4.5%, and then fell back from 4.5%. Besides market and technical factors, Scott Bensent's appointment is an important catalyst for the decline, relieving some concerns about high inflation, which encapsulates the overall situation.
The USD is expected to remain strong in 2025.
Host:
Thank you very much, Mr. Han, for the in-depth explanation. Thank you, Mr. Han.
Next, let's ask Mr. Zhao Qian a question. In September, the Federal Reserve began lowering interest rates, which theoretically should put pressure on the dollar to decline. However, the recent performance of the USD Index has been strong, even briefly breaking the 107 level. What does Mr. Zhao Qian believe is the underlying logic behind the dollar's strong performance recently? Will the dollar continue to maintain its strength in 2025?
Zhao Qian:
From the perspective of the overall fundamentals of the US economy, the US economy is exhibiting this kind of state: nominal wage growth is still relatively high. As the previous inflation rate declined from 9% to around 3%, real wage growth for Americans has improved since the second half of 2023, supporting resilient growth in household consumption. Consumption accounts for about 70% of the US economy, so there has been no hard landing risk for the US economy that people anticipated at the beginning of 2024.
From an international comparison perspective, the USD Index is an overall reflection of the USD's exchange rate against a basket of currencies. Currently, labor productivity in Europe and Japan is significantly lower than that of the USA. This difference in labor productivity among countries keeps many investors hopeful about the future of the dollar. Although the Federal Reserve has made some cuts in the short term, there is still uncertainty regarding the pace, extent, and duration of interest rate cuts by the Federal Reserve in 2025, which maintains expectations for a strong dollar.
In the future, there may be significant fluctuations on the supply side of gold.
Host:
Next, I would like to ask a question about Gold. The performance of Gold prices in 2024 has been very strong, frequently breaking historical highs. What trading logic does this reflect? Will Gold prices continue to remain strong in 2025? How should the short-term investment rhythm for Gold be managed? Let's first hear Mr. Zhao Qian's opinion on this.
Zhao Qian:
Regarding Gold prices, I think if all the factors that influence Gold prices are to be comprehensively articulated, it should be like this: We usually consider that the US dollar interest rates, especially the real interest rates, are a core variable affecting Gold prices, but this only influences the demand side for Gold. A decline in real dollar interest rates will stimulate speculative demand for Gold, while a rise in dollar interest rates, particularly real interest rates, will suppress such speculative demand; however, this is just one factor. Another factor that the market generally overlooks is the supply issue of Gold. In the past, we haven't focused much on the supply side when analyzing Gold prices. The current factors on the supply side can no longer be ignored.
Historically, Gold supply has been relatively stable with no significant fluctuations. However, in the future, there may be noticeable fluctuations in Gold supply. Since 2008-2009, starting from 2012-2013, the world’s top ten Gold mining companies have continuously reduced capital expenditures.
During the commodity bull market from 2001 to 2008/2009, prices rose steadily, and after large resource companies earned profits, they would invest a large portion of their revenue in buying mines to gain more returns. However, after 2011 to 2012 and 2013, the situation changed; the commodity bull market ended, and a turning point in prices was formed. Gold mining companies reduced capital expenditures, which means they decreased or no longer used large amounts of income to buy mines. This has led to a significant decline in Gold reserves for large global mining companies, which have decreased by about one-third, and the grade of remaining Gold mines has significantly deteriorated.
This may lead to a non-linear decline in global Gold production in the future, thereby influencing Gold prices from the supply side. Historically, there have been two similar situations: between 1970 and 1980, global Gold production fell by 19% and Gold prices rose approximately 15 times; from 2001 to 2007/2008, global Gold production decreased by about 11% and Gold prices rose by about 5 times. If future Gold production contracts, shows low growth or even negative growth, it will stimulate speculative demand for Gold. In fact, since 2019, global Gold production has entered a phase of low growth and may even experience negative growth in the future. So from a long-term perspective, the outlook for Gold is good, but in the short term, the price of Gold went from $2000 to $2300, then to around $2600 - $2700. The short-term increase has been too much and contains a lot of concerns about geopolitical conflicts, indicating a high level of speculation. From the perspective of COMEX positions, net long positions have reached historical highs, while net short positions are at historical lows. When the shorts are completely squeezed out, the longs may turn into shorts, so Gold prices may fluctuate around $2700. If it falls back to $2300, it is a good buying position, while $2600 seems high. If investors do not mind short-term fluctuations, they can also invest through RSP.
Compared to the Internet bubble phase from 1999-2000, US stocks still have a 30%-40% upside potential.
Host:
Zhao Qian is optimistic about Gold in the long term and has provided investment suggestions for Gold asset allocation. We discussed the USD, US Bonds, and Gold, and I would like to ask Han about how to allocate the next steps for US Stocks.
Han Tongli:
Regarding US Stocks, predictions have been made in many occasions over the past decade, but the accuracy has been low due to the numerous influencing factors, especially unexpected events. Judging from the PE of US Stocks and market logic, US Stocks are still quite a good investment. The first reason is that from a valuation perspective, US Stocks are not cheap, even expensive, excluding the seven sisters like Google, Apple, and NVIDIA; the PE ratio is 20 times, which is relatively expensive compared to the past twenty years, but compared to previous technology revolution cycles, we should consider the current stage of the AI technology revolution, otherwise the comparison is meaningless. Compared to the internet bubble phase of 1999-2000, US Stocks still have a 30%-40% upside potential (in terms of S&P Index). The second reason is that after Trump took office, there may be inflation expectations, and stocks are assets that resist inflation; their future cash flow discounted is the current asset price, and high inflation means higher cash flow. Viewed from the qualities of American companies, compared to 1999-2000, American companies now have stronger profitability and healthier finances. At that time, leading internet companies had no profitable models similar to today's Cryptos, while now companies leading the AI revolution, like Google, NVIDIA, and Apple, can generate cash flow and profits from their main operations and are capable of paying for the costs of the AI revolution, which is the third reason.
There are actually many more reasons for the fourth reason. Why is the US Stock market so healthy? The fourth reason is this: let's look at a macro data point, which is the five hundred companies in the S&P index.” Cash or cash equivalents on their books account for about 10% of the entire balance sheet.
What does this indicate? American companies have a large amount of cash and are not lacking funds. On one hand, this cash can support companies in continuing to invest in the AI revolution; on the other hand, they have strong resilience to higher interest rate levels and yield levels. Therefore, people previously found it strange that the Federal Reserve raised the interest rates in the USA (USD rates) from zero all the way to 5.5 and yet, why did the US stock market not crash and instead continue to rise daily?
There are two reasons. On one hand, American companies are not short of cash and have hoarded a significant amount of it, resulting in very strong profitability and cash flow generation capabilities. On the other hand, they previously hoarded a lot of cash, and their debt maturity is very long. In other words, during the zero interest rate era of the dollar (during and before the pandemic), American companies issued long-term bonds, constituting long-term liabilities rather than short-term, locking in the cost of bond issuance. On one hand hoarding cash, on the other hand locking the cost of bond issuance.
Thus, when the Federal Reserve raises the short-end policy interest rate, the impact on them is minimal, as they have already locked in long-term debt costs in advance. This is the fourth reason, that is, the financial condition of American companies is very healthy.
The fifth reason relates to the overall health of the US stock market. Looking at its leverage ratio, which is what Chinese stock investors often refer to as Finance and Securities Lending, the leverage ratio of the entire US stock market is very low. Compared to the past twenty years, it is at a mid to low level, in a very moderate state.
Therefore, there is no situation of excessive speculation leading to a sudden collapse because people are not borrowing money to trade stocks, and the leverage ratio is at a very low level. Overall, I believe that the US stock market will at least be a direction worth paying attention to next year.
There are subsequent profit opportunities in the A-share market.
Host:
Thank you, General Han, for providing investors with some insights on asset allocation for the upcoming year. After discussing the overseas market, let's refocus on the domestic market. Everyone should be aware that since the market trend on September 24, A-shares have begun a rebound in bond yields.
From the end of September to early October, the investment ROI of A-shares ranked first globally, but recently, A-shares have entered a period of volatile adjustment. I would like to ask General Zhao Qian, how do you view the future market developments?
Zhao Qian:
Thank you for the host's question. In fact, since 2022, investors' concerns about the Chinese economy have caused changes in domestic bond yields. We have seen the ten-year government bond yield continuing to decline, and the thirty-year government bond yield has also dropped significantly.
In March, the yield spread between thirty-year and ten-year bonds was only about ten percentage points when it was low, reflecting market's lack of confidence in future economic growth prospects. Therefore, after 2022, many assets related to future growth have gradually been avoided by the market, leading to a significant adjustment in A-share asset prices.
Sometimes, it seems that the valuation has become very cheap, so why is it still dropping? It's because there are concerns that the central tendency of future profit growth will decline. After September 24, I feel that the overall market sentiment has improved significantly.
Especially the central bank governor's speech boosted market confidence, so from September 24 onward, the market entered a process of repricing (correcting pricing or repricing), and we saw a significant rebound in the A-share market.
Looking ahead, I believe there are several factors that may present opportunities in the A-share market, at least structural opportunities. First, in terms of A-share valuation, I don't believe the current valuation can be considered expensive, nor can it be said to be in a bubble; it's at least reasonable, and the valuation of some companies may be reasonable but still low, which is the first factor.
Second, the central bank governor's speech on September 24 seemed to provide a strong bottom support for the market; this is the second point. Third, regarding corporate profit growth, from this year's third-quarter report data, many industries have begun to enter the right side.
I believe next year corporate profits will be better than this year. What is the reason? The reason is that the profits of A-share listed companies are currently at the bottom. Next year, our PPI may continue to improve. Recently, domestic PPI has shown a significant decline, largely due to overseas drag.
From 2022 onward, due to the pandemic, residents in Europe and the USA have increased their spending on commodity consumption. Starting from 2022, American households began to spend more on service consumption, and the proportion of commodity consumption decreased, creating a drag on their import prices, which in turn impacted China's PPI.
But what is the current situation? Now, the ratio of American consumers' spending on commodity and service consumption has balanced out, returning to pre-pandemic levels. This means that this rebalancing action may have ended the drag on our PPI. I believe next year, the external factors dragging down the PPI may completely dissipate.
The gradual recovery of PPI will lead to stronger earnings recovery for companies. In this case, it seems that based on the fundamentals, the A-shares should rise next year. Of course, in addition to fundamental factors, we also need to consider other sentiment-related factors. But overall, I believe there is an opportunity looking ahead in a big direction.
Main presenter:
Thank you, Zhao Qian. In fact, the Ministry of Finance recently announced a 10 trillion yuan debt reduction plan. Will debt reduction become the core logic of market trading in the future? What impact will debt reduction have on the domestic bond market? We would like to ask General Han about this question.
Long-term government bond rates may rise.
Han Tongli:
Thank you, host. I believe the Ministry of Finance's debt reduction plan is absolutely correct directionally and is an important tool and correct starting point for resolving current liquidity issues in China and some economic problems.
So from this direction, we believe there is no turning back once the bow is drawn. The market has debated a lot about whether the 10 trillion yuan will be enough. Many bears say it is not enough, while bullish individuals like myself believe this is a very good starting point, so I still maintain my fundamental judgment.
That is to say, future debt reduction measures will definitely be correct, and there is no turning back once the bow is drawn; it will continue in the future, and if it is not enough, it will definitely increase. Moreover, from an overall perspective in China, is the government's debt ratio high? Vertically compared to China in the past, it is currently relatively high, but horizontally compared? The average government debt-to-GDP ratio in the G20 is 120%. Currently, in China, the total statutory and hidden liabilities at the local level amount to 55 trillion yuan. Urban investment bonds are now counted as corporate bonds, but in reality they are government liabilities. All the assets of urban investment correspond to government accounts payable. If urban investment is also counted, it exceeds 100 trillion yuan, which is less than 100% of GDP. Adding the central government's liabilities, it seems not low compared to the G20 but also not excessively high, unlike Japan, the United Kingdom, and Italy, so high, and our overall interest rates have been declining.
In the past, everyone was concerned about urban investment bonds, fearing that local governments could not repay them, but these worries are decreasing. This means that the government's debt cost is declining, which will trigger a positive cycle. Previously, the market criticized that one trillion was not enough, and there are still around fifty trillion of urban investment bonds, but it should be noted that this is a liquidity crisis, and money needs to flow. Once local governments have money, they can pay some accounts payable, even if it's selective repayment, it is still incremental selective repayment. After repaying accounts payable, the operating conditions for urban investment will improve.
Once the operating conditions for urban investment improve, it will drive improvements in other industries, creating a cycle. So overall, I believe it is very optimistic. Regarding the direction of bonds, combined with Zhao Qian's judgment on A-shares, I also agree and am relatively Bullish on A-shares.
Although we haven't experienced the previously anticipated bull market and may have made some mistakes, the overall direction is correct. There may have been errors in the operation process, but it is most important that the overall direction is correct. If China's crisis can be resolved, A-shares can develop into a slow bull market as we expect, and a fast bull market cannot emerge; even if one wishes for it to be fast, it cannot be.
Now, if it is a slow bull, as long as it transitions into a bull market, what does it mean for bonds? The yield curve for bonds will certainly steepen. Why will it steepen? Short-term interest rates will be kept low by the central bank, while long-term interest rates will rise.
Why will long-term interest rates rise? Because the economic environment has improved, the Capital Markets are performing well, the stock market is bullish, and the real estate market has stabilized, funds will inevitably flow from the bond market into the real economy. This is the process of the yield curve steepening.
Investors can allocate 20%-30% of their assets to stocks.
Host:
We have just conducted a series of in-depth discussions on the domestic macro environment and the outlook for policies in 2025. At the end of the event, I would like to ask Zhao Qian about your current thoughts on how to manage the allocation strategy and pace for A-shares in 2025.
Zhao Qian:
Well, I think for ordinary investors, the first question is definitely, I currently have 100 yuan to invest, how should I invest it? In the past, everyone might have used that 100 yuan to buy bonds, for example, buying bond funds or bank wealth management products.
Now I think you can allocate an appropriate portion, such as 20 or 30 yuan, to stock assets, which is our first suggestion. Why do I make this suggestion? Because interest rates on bonds are currently quite low, while the cost-performance of stock investments is relatively better than that of bonds.
The A-shares have experienced a downturn of more than two to three years, during which many companies' stock prices have fallen to reasonable, or even undervalued, positions. In this context, if you look at this investment from a three-year perspective, the cost-performance ratio is indeed very good. This is the first suggestion about appropriately rebalancing between stocks and bonds, meaning taking out 20 to 30 yuan to invest in stock funds while leaving 70 to 80 yuan in bonds.
Of course, we think that since bond interest rates are relatively low now, this means that the investment return rate for holding them over one or two years may not be as good as it was in the past two years; everyone should be prepared for this. This is the first aspect. The second aspect is regarding stock funds; people might ask what type of fund to buy, which type of fund might be better.
Using professional terminology, some investors may ask whether a growth-style fund or a value-style fund is better. My answer is that growth style may perform better next year. Why do I say this? There are several reasons. First, if we look at the style changes of A-shares over the past ten years or the past twelve to thirteen years, we find that there has never been a deep value style that could outperform the growth style for three consecutive years; at most, it can lead for three years, but by the fourth year, it will reverse, and growth style will begin to catch up. In 2022, 2023, and 2024, looking at A-shares, it's fair to say that value has outperformed growth, and blue-chip value has outperformed technological growth.
I think that in 2025, in general, the performance leaning toward growth style may be better than value style. This is the first reason. The second reason is that in the past, due to investors' concerns about economic growth prospects, prices of growth-related assets fell sharply and severely, resulting in many of our growth companies being significantly undervalued, so their cost-performance is actually very good.
Some growth companies offer very attractive yield rates plus other factors. So I think this is the second point. The third point is that we look at the fundamentals of industries from the bottom up. Sectors such as Semiconductors and Consumer Electronics have already shown significant signs of turning around.
Next year, there will be investment opportunities in areas such as AI, pharmaceuticals, and New energy Fund, though these opportunities will not appear simultaneously but rather gradually emerge from the bottom. Therefore, from this perspective, growth-style assets also have good investment value.
In summary, I believe that growth style will perform better than value style. Of course, assets of this kind in the growth style will have greater fluctuations, and we can make an appropriate allocation within this.
For instance, from 100 yuan, you could allocate 30 yuan to a Fund and 70 yuan to Bonds or Wealth Management. Out of this 30 yuan for the Fund, you might allocate 10 yuan to a growth style fund and 20 yuan to a value style fund. This way, it is relatively more balanced and will not cause your assets to fluctuate greatly. I think everyone can make appropriate adjustments based on their own risk preferences.
Whether the Hong Kong stocks can rise depends on whether the liquidity issue can be resolved.
Host:
Thank you, Mr. Zhao, for your response. Not only did you remind everyone to rebalance their major asset allocations, but you also provided new suggestions on specific styles, all of which are derived from in-depth communication with the market and users, and are very much needed by investors. At the end of the program, we would like to hear the two guests share their thoughts on the allocation strategy for Hong Kong stocks. Firstly, let’s invite Mr. Han to share his views on Hong Kong stocks.
Han Tongli:
That’s right, as I work and live in Hong Kong, I have accumulated over a decade of experience here. Overall, there are indeed some difficulties in the Hong Kong market, especially regarding liquidity.
In fact, I believe the core issue is liquidity; the liquidity in the stock market is very poor. As everyone can see, the trading volume of Hong Kong stocks in a day is less than that of Apple stocks in a single day, not to mention NVIDIA and Tesla.
The first issue is liquidity. So, I believe the key problem lies in whether we can solve the liquidity issue. If it can be resolved, then Hong Kong stocks are a very good investment choice. Why? Because they are very cheap, with a valuation multiple of only seven to eight times, less than ten times. Of course, this refers to the valuation multiple.
Some non-professional investors may be easily misled by valuation multiples; it does not mean that a low valuation multiple inherently indicates a buy, nor does a high one indicate a sell. The price of the stock itself is a core issue, and the essence and root of the price problem is liquidity.
When liquidity dries up, the valuation multiple can drop to two or three times, as the Russian stock market is a vivid example. Conversely, when liquidity is abundant, the valuation multiple can rise to twenty times, which is explainable.
Therefore, the valuation multiple can only indicate whether it is cheap; it is indeed cheap, but that does not mean that cheap things will necessarily increase in price or that expensive things will definitely decrease in price. This is a distinction that investors must clearly differentiate between the concepts of cheap and expensive. First, we should not buy things that are too expensive.
However, this statement sounds correct but is actually incorrect. You say that I only buy cheap things and avoid expensive ones; this statement sounds correct, but it is problematic. Investing is about making money, about prices rising, not that being cheap inherently means that it will rise; it could become even cheaper, and expensive things can also become more expensive.
We should buy assets that are both cheap and can rise, which is the ideal situation. Hong Kong stocks first possess the characteristic of being cheap; can they rise? I believe it depends on whether we can ultimately solve the liquidity issue. Currently, I am quite optimistic.
Because I believe the direction of the domestic policies and the trends of A-shares is correct. The premium rate of A-shares compared to Hong Kong stocks has an index close to forty-five percent. The same listed companies listed in both A-shares and Hong Kong stocks, on average, show that Hong Kong stocks are forty-five percent cheaper than A-shares, which is over forty percent off; thus, they are absolutely cheap. Moreover, H shares listed in Hong Kong, which are Chinese companies listed in Hong Kong, may have better quality.
Why is that? Because its corporate governance is healthier, its systems better protect investors, and its governance structure is also healthier. Moreover, the complementarity with A-shares is very strong; previously, most companies listed in Hong Kong were internet companies and some high-dividend businesses, whose dividend rates are higher than those in the A-share market. Therefore, if we only compare Hong Kong stocks with A-shares, Hong Kong stocks are superior to A-shares in terms of both affordability and company quality.
However, returning to the fundamental logic, this does not mean that buying Hong Kong stocks will definitely yield profits because prices need to rise; if there is no increase, the current situation of Hong Kong stocks has persisted for many years, where prices fall lower, and there will still be losses. So, as of now, I believe that as long as the issues in China are resolved and the policies take effect next year, the benefits of Hong Kong stocks will be greater.
Another reason is that the market structures are different. Market structure refers to the investor composition; the A-share market is basically played only by domestic investors, while the Hong Kong stock market is different. Previously, most investors in Hong Kong stocks were foreigners, and the proportion of foreign assets was very high. Even if they had Chinese capital backgrounds, purchasing with Hong Kong dollars is still not the same.
This is because Hong Kong dollar assets can be converted into any currency, such as USD, EUR, JPY, etc. Therefore, comparing the upward potential of Hong Kong stocks involves analyzing several different markets. Only when Hong Kong stocks have absolute attraction will I leave money in Hong Kong to invest, which is different from A-shares.
Thus, this is both an advantage and a disadvantage. The disadvantage is that the funds in Hong Kong are not locked in; they can flow globally. In other words, global funds can also converge in Hong Kong, and when conditions are poor, Hong Kong's funds can quickly disperse globally. This is a significant structural difference from A-shares.
Host:
Okay, Mr. Han reminds everyone to buy good products at good prices. We also want to hear from Mr. Zhao Qian about his views on the future trend of Hong Kong stocks.
Zhao Qian:
I think that at this stage, the basic analysis of the Hong Kong stock market and A-shares is generally similar.
However, the assets of the Hong Kong stock market and A-shares are different; the funds in the Hong Kong stock market may be influenced by global liquidity, meaning the denominator may be affected by global liquidity, while the numerator may be influenced by China's economy.
From the perspective of global liquidity, if the Federal Reserve's interest rates remain at a high level next year, the expansion space for valuations in the Hong Kong stock market will be relatively limited, and it is unlikely that there will be a significant expansion in valuations like that caused by a large influx of US dollar liquidity or a significant drop in US dollar interest rates. Therefore, the only driving factor may be more focused on the numerator, that is, whether corporate profits can improve and whether listed companies can earn more money than before.
From this perspective, the analysis logic is quite similar to A-shares. I believe that the Hong Kong stock market is currently cheaper than A-shares in terms of pricing and asset prices, so once the fundamentals improve, the elasticity of the Hong Kong stock market will likely be greater than that of A-shares.
Investors who prefer high volatility might consider using A-shares and Hong Kong stocks to create a diversified investment. Whether it’s A-shares or the Hong Kong stock market next year, I believe the core driving logic still lies in both the numerator and denominator, and it may be difficult to see significant index movements.
This is because, from the perspective of external liquidity, such as US dollar interest rates, the conditions are not yet met. Therefore, a more favorable scenario would be a slow bull market for both A-shares and the Hong Kong stock market. Is it possible for a slow bull market to occur? This is a topic of much discussion among domestic investors and one of the most debated issues; some believe it’s possible, while others do not.
However, around noon yesterday, it was noted that recently some overseas funds have been betting on a slow bull market in China. A couple of days ago, I saw reports from overseas media stating that a mysterious overseas trader bought three times the bullish options for the FTSE China A50 Index, spending around over one hundred million US dollars. Not only did he buy this, but he also purchased two times the bullish options for the 300ETF. Through this approach, he is betting on a slow bull market in China because we know that buying options requires paying an options premium, and options premiums can be expensive; if there is no increase, the premium becomes worthless, leading to significant volatility. In fact, there needs to be significant upward movement in the index to cover the options premium. Therefore, I believe this trader is mainly betting on the possibility of a slow bull market in China, making bets on both the A-shares and the Hong Kong stock market, one on the FTSE China A50 and the other on the 300.
From his trading logic, he is betting on a slow bull market, as I just shared with everyone. I believe that if the negative pressure from external PPI fully dissipates next year, our corporate profits may indeed see significant improvement.
At this time, there is a possibility of gradually pushing the Index up. During the gradual rise of the Index, you will find that the structural opportunities between different Industries will definitely increase. It is important to find those Industries with very good fundamentals for next year. Of course, I think this brings up another topic, which is whether it is better for ordinary investors to Buy broad-based Indexes or to buy actively managed Funds. I believe that in next year's market environment, actively managed Funds may perform better. So everyone can make choices based on their preferences, that’s about it.
Host:
Thank you, General Zhao Qian. So actually, investing is a relatively challenging task, and everyone can continue to pay attention to some viewpoints and product sharing from China CITIC Bank Corporation.
Today, in the major asset segment, we talked about changes in the US Stocks, A Shares, Hong Kong Stocks, US Bonds, and China Bonds, covering almost all major asset categories. Many thanks to the two guests for their wonderful sharing; they profoundly analyzed the core logic of the current domestic and international economic new situation and policy changes, and elaborated on their views on future market changes from an extremely professional perspective.
I believe that friends in front of the screen must have gained some insights. When dealing with future complex changes, they will also have more confidence.
