Zhang Haoran

In 2024 Q1, the market’s focus remains on the economy. Although investors were looking keenly for signs of recovery—exports, infrastructure, manufacturing, consumer spending, real estate—data cannot fully support such a conclusion. The valuation of the A-share market did not implied a positive outlook, thus leading the current period of sideways drift. Further upswing of the market may hinge strongly on whether economic recovery takes place.

A strong economic recovery would bring favorable opportunities in the equity market. Based on historical performance, quality and growth stocks would outperform in this scenario. However, if the economy remains sluggish, the equity market may stay at the current status. Dividend stocks will continue to rise in the short term, but investors should be cautious about overvaluation.

Current economic data are insufficient to prove that strong recovery is coming. It is therefore more prudent to construct a portfolio that does not fully commit to either an optimistic or a pessimistic judgment. Such a portfolio has two priorities: 1) identifying assets that appreciate significantly during a strong economic recovery and depreciate modestly in an economic downturn (i.e., asymmetric returns) and vice versa; and 2) constructing a portfolio that benefit from both vigorous recovery and mild fluctuations. A strategy like this may offer a more robust return.

Hu Yunfeng

We have seen a notable rebound in the market since February, and indices have recovered mostly in proportion to their previous declines. Value stocks continue to produce robust returns. Some even achieved record-high returns as sectors begin to diverge in performance (ferrous metals stocks have performed notably worse than the non-ferrous metals and oil & gas stocks since March).

It is difficult to accurately distinguish cyclical stocks from value stocks. Differences in economic environment, lifecycle stage, and market position within the supply chain may cause a stock to demonstrate an intrinsic value and performance different from what its apparent classification suggests. This is the case with coal. The value floor coupled with cyclical volatility, has complicated investment decisions, but also allowed alpha creation for active funds.

A key value creator is cash flow. For a seemingly cyclical stock, strong cash flows can substantiate its investment value and may be one of the reasons for its consistent higher-than-expected performance. Therefore, investing in companies with robust cash flows or the ability/potential to generate cash flows, or in the funds that invest heavily in those stocks, may be one approach to successfully navigate a volatile market.