Review of Capital Market Practices in 2023：
Accumulated knowledge largely determines the career development path of each individual, and of course, it also influences one’s interests in life because only passion can drive career advancement. In a sense, our small group is all about studying humanities and social sciences, carrying some elements of liberalism and romanticism at the core. We aim to make some changes to society and the economy through what we do. Since November 2022, we decided to shift from pure economic research to practical experience in the capital markets.
Looking back, in the past 13 months, we started with Chinese stock assets, expanded to global equities, then ventured into the bond market, including external bonds and Chinese bonds. Due to our relatively small overall portfolio, we invested in Chinese stock market, U.S. and Japanese stock indices, ETFs for gold and precious metals, and Chinese government bonds. After these 13 months of practice, we have achieved significant gains.
Previously, our understanding of economic history was quite broad, often using a 10-year benchmark. However, in practicing the capital markets, we discovered that the economy is not as predictable in the future as rational expectations suggest. In fact, we are all moving forward in our thoughts about the future. Residents decide their savings, and entrepreneurs decide their investments in this process. The ups and downs of the capital market are also consistent with the economic climate, making it an exciting and thrilling process.
Through continuous learning and practical experience in the capital markets, our second book, “Research on Currency Stability, Inequality, and Business Cycles” provided us with a macroeconomic analysis framework of overall demand. We deeply understand that the purchasing power of labor wages is a core indicator in evaluating the health of an economy, as has been the case in the development of major market economies over the past century. Our third book, “lStages of Economic Development Study 1978-2023” made us realize that China’s economic cycles have never been smooth. Premier Zhu Rongji, with his boldness and courage, led China’s economy out of the quagmire in the 1990s. Looking at it from today’s perspective, such a great social practice is truly commendable.
We ask ourselves whether we are Marxists or not. Practice is the only criterion for testing the truth, rather than creating concepts or mysticism. The fourth book we are currently writing, tentatively titled “Ideology, Inclusivity, and Growth,” has made us understand that the civilization determining the social organizational form in modern state relations is indeed crucial. However, it does not hinder us from developing market economy commodity relations. There is no reason to believe that the capital market’s performance is due to a particular social production relationship; this is non-existent. The thickness of the common people’s wallets and the performance of the capital market are essentially consistent.
In the process of practice, we have also come to understand the concept of the cost of stock chips and the various short-selling mechanisms. Unlike before, we couldn’t have imagined that there exists discrimination against small and medium-sized investors in the design of capital market institutions. For example, for small and medium-sized investors to profit from the Chinese capital market, they must accept a management fee. However, this fee is not determined by market mechanisms; it is a typical rent-seeking behavior. We have also recognized the concept of capital idling. When the entire capital market fails to provide a secure and stable return mechanism for small and medium-sized investors, people naturally choose to keep their money in banks. When banks also lose their targets, they can only invest in government bonds with yield rate differentials. Regardless of how much the central bank provides in terms of rediscounting or MLF to commercial banks, the banks cannot effectively invest in the market. Looking at mature mutual funds worldwide, the interests of fund managers and investors are almost permanently tied, rather than charging management fees while simultaneously engaging in margin trading. Profiting from both long and short positions raises questions about the nature of such a capital market.
Combining learning with practical experience, we reflected on our buying and selling behaviors throughout the year. One insight is that the pursuit of target return rates determines our tolerance for operational risks, and holding specific emotional attachments can be detrimental to trading. In a market economy, conditions should be communicated through data, and close observation of the balance sheet is crucial. Starting from mid-2023, we shifted our focus from the Chinese stock market to the global market. In fact, as early as the beginning of 2023, the market had already conveyed a message: Buffett was buying Japanese assets. Due to our lack of experience at that time, we did not realize the significance of this information. Japan’s CPI had been maintaining around 2.5% from the second half of 2022, and the GDP growth rate was expanding. While we were still casually observing Japan’s turmoil, Buffett had already started buying Japanese assets. We did not anticipate the economic condition after Japan experienced inflation in our study of world economic history. Looking back now, following Buffett‘s purchase of Japan would have been one of the best global assets in 2023. We started buying Nikkei 225 ETFs from May 2023, half a year later than Buffett, but we also gained some dividends.
Apart from Japan, Nasdaq was also one of the best-performing asset targets in 2023. We began buying Nasdaq index ETFs in July 2023 because our understanding of the U.S. economy was clearer than that of Japan. Therefore, we had more confidence in Nasdaq and dared to chase its rise. Of course, during this period, we also reaped some dividends. In 2023, technology companies, mainly in Nasdaq, continued to lay off employees while reporting increasing financial results. The high-interest-rate environment indeed restrained financing activities for technology companies, but the balance sheets of U.S. technology companies remained robust, with no signs of bankruptcy due to financing issues.
In 2023, we experienced an overall failure in the A-share and Hang Seng markets, with an overall retreat of about 10%. We once thought we had the ability to enter the market on the left side because we had studied the operational state of China meticulously. However, practical experience taught us that heavily entering the market on the left side is a super risky behavior, and we still lack a thorough understanding of the overall economic framework and long-term development.
Our comprehensive view, with real estate stabilizing prices as the research framework, gradually took shape in September-October 2023, which was too late. Of course, after the formation of this framework, we promptly carried out certain closing operations, avoiding the expansion of losses in the fourth quarter.
If we observe the Chinese economy through labor wages and real estate prices, the real estate market may still face considerable pressure for adjustment. On one hand, the Chinese economy is undergoing an adjustment in the supply and demand of real estate. A 20% reduction in housing prices may be acceptable to the market, but if it reaches a 50% reduction, that could be a rather terrifying scenario. On the other hand, we need to answer the question of how much economic growth potential China still has. We don’t believe in the myth that the investment rate will not decrease. It’s not possible to use all the country’s wealth for infrastructure. So, where is the economic growth potential released through reform? This is the most important factor besides real estate.
In the latest IMF World Economic Growth Forecast, China’s growth rates for 2024 and 2025 are projected to be 4.6% and 4.1%, respectively. While 4% is still a relatively good growth rate compared to the global economy, it falls below China’s medium- to long-term growth target. Around 2021, people were still envisioning China maintaining a growth rate of around 4.7% over the next 15 years. Technological progress in the United States can drive its economic growth, with a long-term growth center around 2%. If China removes this 2% from its 4% growth rate, where does the remaining 2% come from? This is a question that reform needs to answer.
One viewpoint we support is the equalization of basic public welfare. Numerous large cities cannot rely on financial resources to enjoy an excessively high return on the national economy while also benefiting from subsidies from central fiscal welfare. This is an unfair practice. From a human perspective, everyone should have the right to enjoy education, healthcare, and retirement benefits provided by the state. In some aspects, this also determines China’s challenging demographic issue, which could be a significant obstacle to overall growth confidence. We rushed to release our third book in 2023 to coincide with the Third Plenary Session, but now it appears that the Third Plenary Session will be held in 2024. We have a lot of work to do, and many economic development questions need answers.
External Markets:
In the last report before the New Year, let’s briefly discuss global and domestic markets. In the past two weeks (January 22 – February 3), the most crucial data was the U.S. fourth-quarter GDP year-on-year growth rate of 3.3%, a significant drop of 1.6 percentage points from the 4.9% in the third quarter, far exceeding the market’s expectation of 2% for the fourth quarter. Subsequently, during the Federal Reserve’s interest rate meeting, Powell announced that the Fed would maintain its policy interest rate unchanged. As a result, any concerns in the market about a hard landing have completely disappeared, and the bearish forces on the Dow Jones and Nasdaq are negligible. During the press conference, Powell introduced a conceptual point: he needs to be confident enough through data observation before taking any interest rate cuts. In his interaction with reporters, we found three points worth pondering:
1) Powell stated that in the past six months, the overall inflation situation has been very satisfactory to the Federal Reserve. In response to a question from a reporter about what is sufficient confidence, Powell did not provide specific data indicators. Instead, he gave a broader description: inflation falling more sustainably towards 2% is enough confidence for the Fed. However, more data support is needed.
2) Another question reporters were concerned about was whether interest rate cuts would be too slow, meaning there might be an economic situation where inflation is still above 2%, but the unemployment rate has risen, and excessively high interest rates have caused damage to the economy. Powell did not give a direct answer; he only expressed the Fed’s attitude. He does not want to see such a scenario, reiterating that the Fed’s interest rate policy does not intend to damage the job market.
Based on the first and second questions, we can conclude: Will a drop in U.S. inflation to 2.5% be sufficient for the Federal Reserve to be confident? In December 2023, U.S. inflation was 3.4%. Before the FOMC meeting in March, inflation data for January and February will be released. The current forecast for January’s CPI is 3.0%. At this rate, inflation in February will likely be between 2.5-2.7%. In other words, the possibility of the Fed starting to cut interest rates in March still exists, and it will almost certainly happen in May.
3) Reporters also separately asked whether the U.S. real estate market would have an impact on the Fed’s monetary policy. Powell focused on several points regarding the U.S. real estate market: 1) Prices of commercial properties are indeed rising continuously. The Fed’s monetary policy does not have tools to directly influence real estate prices; it is more of a market behavior. Although it is a crucial part of U.S. inflation, the Fed’s intervention is more of a comprehensive indicator, and they will not refrain from cutting interest rates just because housing prices are rising too quickly. 2) There have been some changes in the supply and demand of the U.S. commercial real estate market. More residents are leaving large cities and buying their own properties in the surrounding areas, which has indeed led to short-term supply shortages. Additionally, the market is concerned about the possibility of bad debts from commercial real estate causing problems for regional banks. Last week (January 22-28), there was already a significant drop in the stock prices of regional commercial banks. However, during the press conference, nobody seemed very concerned about this. This suggests that the risk of this matter may be relatively small, but it is worth continuous attention.
Domestic Markets:
Throughout 2023, the domestic economy showed a trend of peaking and then declining. After a significant recovery in the first quarter due to the easing of the pandemic, the macroeconomy displayed a sluggish trend in the following three quarters.
In the past two weeks, the domestic market experienced significant fluctuations. From January 22 to 26, various departments, including the State Council, the China Securities Regulatory Commission, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the State-owned Assets Supervision and Administration Commission, issued a series of policies to maintain the stability of the capital market. The central bank adopted policy tools such as structural interest rate cuts and comprehensive reserve requirement ratio reductions. It will release one trillion yuan of long-term liquidity into the commercial banking system on February 5. The overall capital market performed relatively well on January 25-26, rising to 2900 points. However, in the following five trading days, it experienced continuous retreats, falling below 2700 on February 2. Overall, there is a lack of confidence in the capital market regarding the entire regulation. The manufacturing PMI for January, released on January 31, was 49.2. Although it increased by 0.2 percentage points, it remains below the prosperity level of 50. More importantly, high-frequency data for January, such as real estate sales and price data, both saw significant declines. Stabilizing stock prices separately when real estate prices are unstable is a challenging task.
From the actions in January, it seems there may not be more significant policy support before the Chinese New Year. We are conservative about the market trend.
Wishing everyone a Happy New Year!
