Zhang Yajun

The year is off to a good start with a qoq uptick in Q1 due to accelerated government spending and a recovery in export. However, stringent financing controls are in place for the key regions seeking to resolve their debt issues. As a result, the notably scaled-back infrastructure activities in these areas since the start of the year have offset the high growth in construction activities. Based on the current intensity of the debt control efforts, we anticipate that the reduction in net financing by local government financial vehicles (LGFVs) in the year will nullify the effects of issuing medium and long-term government bonds, substantially slowing the pace of fiscal expansion. Furthermore, situation in the real estate sector has further deteriorated. The sale of second-hand houses saw modest recovery, while the sale of new houses remained stagnant. The number of both existing and new housing projects continues to fall; and developers still have to trade prices for sales.

In terms of asset performance, the rapidly falling bond yields in Q1 has created a bullish market, especially for the ultra-long-term bonds, in contrast with the large volatility in the stock and convertible bond markets. Pricing continues to be based on the longer-term instruments, reflecting little of the marginal change in the short-term bonds. Taking the fundamentals, liquidity, and valuation into consideration, we recommend maintaining a large, but not excessive, position in all bond assets and raising the overall liquidity level, to enable the portfolio to cope with all market conditions.

Li Zhongyang

In a reversal of the previously pessimistic sentiment, market confidence has recovered swiftly since the start of the year. Amid current economic transition, we tend to look for structural industry trends in the following three areas:

1) Manufacturing companies that are winning global market shares with more competitive products;

2) Tech companies that may benefit from the structural market demand led by the economic transition and thus industrial upgrades;

3) Industry leading companies: Industries are more cautious about expanding capacity and less prone to reckless capital investment. This shift may improve the overall competitive landscape, resulting in higher stability in the expected long-term returns of well-managed industry leaders and thus higher returns for the shareholders.