At the beginning of the New Year, the market has shown a challenging situation

At the beginning of the New Year, the market tragedy is unprecedented! The A-share market had its worst January since 2016, with the CSI 300 index tumbling 6.3 per cent, its sixth straight monthly decline. Shenzhen's growth Enterprise Index, which represents growth stocks, fell 16.81 per cent; Hong Kong's Hang Seng index fell 9.2 per cent, with the H-share index near 2005 lows; Taiwan fared slightly better, with the index down just 0.2 per cent; The MSCI index of Shanghai, Shenzhen and Hong Kong investable markets continues to fall 11.9 per cent this month. From the perspective of industry sectors, only the central enterprises concentrated in oil, coal and banking rose, and the "market value management" proposed by the State-owned Assets Supervision and Administration Commission contributed.

The performance of the stock market seems to deviate completely from the macroeconomic indicators. In 2023, China's annual GDP growth of 5.2%, of which domestic consumption contribution to GDP growth reached 82.5%; Electricity generation and electricity consumption increased by 5.2% and 6.7% respectively. In January, the manufacturing PMI and non-manufacturing business activity index were 49.2% and 50.7%, respectively, up 0.2 and 0.3 percentage points from the previous month. Since January, the central and local policies to stabilize growth have increased and are rapidly advancing, which may further support the economic recovery and improve, and the momentum of economic repair is expected to consolidate.

Nor does the market reflect regulatory stimulus. The central bank said it would cut the reserve requirement ratio for commercial banks by 50 basis points, effective February 5, and cut the rediscount rate for bank loans to small businesses and agricultural enterprises by 25 basis points to 1.75 per cent. The RRR cut is expected to inject about Rmb1tn of liquidity into the market. We expect that the central bank may adopt a more accommodative monetary policy, including lowering the lending base rate and the medium-term lending facility rate. Separately, the CSRC issued new rules suspending the lending of restricted shares. There are reports that the government will set up A 2 trillion yuan stabilization fund to invest in A-shares through northbound trading, and inject at least 300 billion yuan into the A-share market through China Securities Finance or Central Huijin. In terms of real estate, local support policies further increased: Guangzhou, Suzhou and Shanghai optimized purchase restriction policies, and Nanjing lowered the mortgage loan interest rate for first homes to 3.9%.

In our view, investors' lackluster response to economic fundamentals and policy stimulus may be based on several factors: For overseas investors, they are concerned about structural long-term risks such as local government debt, real estate crisis and population decline; As for domestic investors, they are more pessimistic than overseas investors, concerned about the above three long-term issues, but also worried about the US-China relationship, the short-term decline in wealth and this tepid stimulus policy by regulators. Whether more powerful easing stimulus policies can be landed and whether the stabilization fund can be launched as soon as possible, let us wait and see.

The draft of new rules for online games has been withdrawn. Regulators approved 115 new video games in January, after approving 105 new games in December. The government's move is good news for the game industry and investors, and we hope that over-regulation will not happen again!

On January 13, Taiwan's leadership and legislative elections ended with the election of Lai Ching-te of the Democratic Progressive Party (DPP), the KMT holding the largest number of seats in parliament, and the Taiwan People's Party holding a key minority position in the Legislative Council. Although the DPP won a third consecutive term as leader, the loss of the DPP's majority in the legislature will make it more difficult for the ruling party to pass laws and implement policies that will help balance Cross-Strait relations. In economic news, Taiwan's export orders fell 16.0 per cent in December from a year earlier, well below market expectations. We expect mid-to-high single digit growth in its export orders for 2024.

Some A-share companies have announced 2023 performance forecasts. Huaming Equipment is expected to achieve a net profit of 530 to 560 million yuan, an increase of 48.3% to 55.8%. As a leading manufacturer of domestic transformer tap-changer (used to regulate the output voltage of transformers), the company has a solid position in the industry (domestic market share of more than 80%) and excellent profitability. Under the background of the return of the power grid boom and the acceleration of the opening of overseas markets, Superposition Company has continued to break through the tap-changer in high-end fields such as UHV and accelerated its layout overseas. The company is expected to give full play to the advantages of technology, industrial chain, production capacity layout and usher in comprehensive development. Zhongji Xuchuang is expected to achieve a net profit of 2-2.3 billion yuan for the whole year, an increase of 63.4% to 87.9%. The rapid growth of the company's performance is mainly due to the revenue growth brought by the continuous increase of 800G/400G shipments of major overseas AI/ cloud computing customers, as well as the continuous improvement of gross profit margin driven by the increase in the proportion of 400G/800G high-value products and cost reduction and efficiency. In addition, the fluctuations of the US dollar exchange rate also have a certain positive impact on the company's revenue and gross profit margin. Looking forward to 2024, global AI computing power investment is expected to continue to boom, and the company is expected to continue to enjoy industry dividends as a leader in the optical module industry.

We believe that investors will return to the market with further RRR and interest rate cuts in 2024 and more positive signs of economic recovery.

Industries with policy priorities will benefit from the next generation of information technologies, including 5G, smart vehicles, artificial intelligence, industrial automation, and more; Import substitution - integrated circuits, optical modules and high-end manufacturing; Beneficiaries of a recovery in consumption; Beneficiaries of the new energy era, including storage and automation; And Greater China healthcare - particularly in innovative drugs and devices, assisted reproduction, geriatric care and surgical recovery.