Year to date, China economic recovery was weaker than expected, market sentiment hit low and most equity investors suffered losses. Although the policy cycle has clearly “bottomed out”, investors are still lack of confidence, worrying that “this time is different”, as China faces the Sino-US tension and challenging economic condition.

Policy signal is very strong and gradually step-up.

Since the July 2023 Politburo Meeting setting the tone of “revitalize the capital market, boost the investor confidence”, to August 2023 equity trading stamp-duty cut by half, tightening major shareholder selling stocks and reducing IPO supply, to October 2023 Huijin Corporate (China sovereign fund) raising stakes in the Big Four Banks. The government intention is clear and the measures are getting strengthened. This was not simply “rescue the stock market” as the current market is not in liquidity crisis like 2015. “Revitalize the capital market, boost the investor confidence” is aiming to push the economy upwards and to turn the public expectations. It is a key policy tool under the big picture of macro economy, not just a stimulus to stock market. We expect more measures will follow.

Based on analysis of macro environment, valuation and sentiment, the market is ready to bottoming-out.

Both industrial production and foreign exchange data showed signs of improvement in Sep 2023. September PMI (both manufacturing and non-manufacturing) continued to recover and stayed in the expansion zone (above 50). Despite the strong US dollar against other major currencies, RMB/USD forex has been stabilized recently and its impact on the stock market reduced. In terms of valuation, all major indices (PE) across different styles have been trading at lows since 2020, leaving little room for downside. Sentiment-wise, A share’s daily volume hit YTD low of RMB 570bn in September. Those are indicating the market is at bottom.

Market bottoming-out will always follow the policy bottoming-out, no exception for this time.

Different from the market majority, we don’t think “this time is different” despite complex and challenging internal/external environment. Looking back at 2008 global financial crisis, 2012 China economy downturn, 2015 China equity market liquidity crisis and 2018 Sino-US trade conflict, each time market bottomed out 3-6 months after the policy cycle turnaround without exception. Although we are seeing new challenges such as Sino-US tensions, sluggish domestic demand, and local government debts, we must also keep our perspectives in the huge potential of China’s economy: the urbanization rate, per capita GDP and consumption are still at relatively low level compare to developed countries and thus, have rooms for growth. In the past 5-10 years, China economic power and global competitiveness were rising not declining. We should be confident about China economy as well as its stock market.

One needs not only the confidence, but also the investment method.

There is no need to focus too much on the market downside risks at this stage as the risk-reward profile is extremely attractive. The potential downside might be 5-10%, but the potential upside could be doubling. It is a matter of time for the economy and the market to turnaround. Rather than worry too much about further losses, one should prepare for the future with the right investment method.

All investment methods are aimed to find the mispricing, hence, obtain excess return.

Discretionary investors find under-valued stocks from fundamentals perspective, while Quant strategy seek mispricing from factor analysis. The past two-years lacklustre performances of fundamental strategies were partly due to the cyclical reasons when big-cap growth stock valuation corrected after mid-2021, and partly caused by secular trends where capital flows into quant index enhancing products/funds. Quant strategies currently take about 25% of the China hedge fund total AUM, which is still low compared with US market. The money flow into quant will continue going.

We have been upgrading investment methods by exploring the quandamental research.

Investors keep learning and the market keeps evolving. When more people use the same investment method, the effectiveness of this method will be reduced. If everyone is value invester, the alpha of value-investing will be diminishing, and it’s the same for quant strategy. We spent past three years exploring the combination of fundamental and quant research and have been applying it into the real investment. The 30-year experience of discretionary investment could be turned into advantages rather became a burden. Instead of build a separate quant team alongside of existing fundamental research team, our analysts are learning quant tools and combining the advantages of both fundamental and quant research. The quandamental approach is differentiated and to pure fundamental or quant strategy, and this is effective way for the future.