Chen Wang

In Q3 2023, especially in September, the economic data showed signs of improvement, with noticeable enhancement in industrial production and consumer spending. Looking ahead, as the effects of relaxed real estate policies become apparent, the downward trend in real estate sales is expected to reverse. The Central Government's issuance of 1 trillion yuan of treasury bonds will have a significant stimulation on infrastructure investment in the next six months. Considering the improved external demand and its impact on exports, the economy is expected to stabilize and rebound in Q4. At the early stages of recovery, with sufficient supply, key price indicators such as CPI and PPI are expected to remain low. Due to low inflation and the unstable foundation of the economic recovery, coupled with a significant supply of government and local bonds before the end of the year, monetary policy is expected to remain accommodative, and interest rates are expected to remain low. However, there may be disturbances in the money market, leading to increased volatility.

From a valuation perspective, the stock-bond yield spread is about 2 standard deviations, indicating that equities are undervalued. Considering the stabilization and rebound of the economy, equity assets have good allocation value. In terms of bonds, after the adjustments since August, bond valuations have somewhat recovered, and credit bonds have better cost-effectiveness than interest rate bonds. Currently, credit spreads are at historically high levels, making credit bonds attractive for yield. Among them, subordinated capital bonds and perpetual bonds have higher spreads and better liquidity, making them key allocation options. Given the significant supply pressure on government bonds in the next two months, they are expected to remain volatile and can be temporarily underweighted. However, if the supply impact leads to a sharp increase in yields, we should consider increasing the allocation of interest rate bonds to increase the portfolio's duration.

Kang Yang

Fundamentally, the most challenging phase of China’s economy has passed, and we are currently in a process of continuous recovery. The implementation of a series of macro policy measures is also stimulating economic vitality. The rebound in macro fundamentals is expected to improve corporate profitability and earnings quality. Currently, equity market valuations are at historical lows, and market pessimism has been fully released, making equity assets a good investment choice. Consumption and pro-cyclical sectors currently have low expectations, and with the gradual improvement of fundamentals, there is a possibility of double-digit growth in many individual stocks. The technology sector experienced a significant adjustment in the third quarter after a rise in the first half of the year, but changes in industries driven by new technologies such as AI are really happening. There are still good opportunities in both infrastructure and applications.

Convertible bonds have seen significant valuation adjustments since October, and currently both equity-related and bond-related valuations are at relatively low levels over the past two years. This presents an opportunity to focus on structural opportunities, with a particular emphasis on the allocation of undervalued balanced convertible bonds. Some underlying stocks in balanced convertible bonds have been active, but the price volatility of the convertible bonds is minimal, reflecting the market's concern about the sustainability of their underlying stock activity. However, historical data shows that stock volatility tends to cluster, and this type of undervalued and balanced securities present a clear discrepancy between valuation and elasticity, providing opportunities for many individual securities. Recently, the low end of the market has also seen a significant downward shift, with high pure bond yields in many securities, making them suitable alternatives for pure bond investments. In addition, there are new bonds being issued continuously, and in a market with declining valuations, the pricing of new bonds is often "one-time fixed". We could focus on the allocation of newly-issued bonds.

Regarding new shares, in the short term, the issuance pace has slightly slowed down; but in the long term, it is expected to become a regular occurrence. Actively participating in the subscription of new shares through the IPO offline under the registration-based system remains a very effective way to enhance portfolio returns.