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In the first half of the year, the financial markets have experienced tumultuous fluctuations. Compared their performance in Q1, global safe-haven assets have overall performed worse in Q2, as interest rates of the 10-year Chinese, US, German, and Japanese government bonds rose across the board. The US dollar index suffered the longest consecutive decline since 2018, with its largest decline exceeding 7%. Gold prices fluctuated at high levels. As risky assets rebounded sharply, major stock indexes around the world also rallied and returned to their pre-pandemic levels. The NASDAQ broke another record high– exceeding 10,000 points– and the China GEM Board hit a new high after the 2016 meltdown. Brent Crude (ICE) price rose more than 100% from its lowest point to above $40 / BBL.
Governments have made a series of monetary and fiscal policies to adjust to the current climate. Increase in asset prices requires an easing monetary environment. Thus, the US started fiscal deficit monetization, and the People’s Bank of China launched a number of monetary policy tools. Monetary easing turned into credit easing, and money continued to flow into the real economy from the financial market, which helped avoid the liquidity trap in major economies. Although the world is in the grip of a pandemic and is yet to recover, optimists believe that the global economy may have bottomed out.
As the Chinese domestic economy recovers and enterprise profit improves, the trade-offs in the structure may outweigh the fluctuations of the stock index. We believe that compared to companies in the Internet, Telecom, EV, healthcare, agriculture, and consumer goods, leading companies in automobile, aviation, brokers, military industry, and bulk industrial products have used the pandemic as an opportunity for change and have gradually improved in cost performance.
In the long run, leading companies that drive and benefit from China’s economic transformation possess large market value space. Their influence on the overall market and index will continue to
expand as their market shares continue to grow. In recent years, while overseas funds are expanding their allocation of RMB assets, Chinese households are also accelerating the allocation of their financial
assets. Therefore, the stock market is expected to usher in a slow bull.
In the second half of the year, the external environment is expected to be relatively friendly to emerging markets and the Chinese market, given the moderate economic recovery in Europe and the US, the relatively easing policies of major central banks worldwide and the weakening of the US dollar. In China, the pandemic has been effectively controlled and strictly guarded, the public is comparably safe and healthy, and the economy has taken the lead in recovery. Fiscal and monetary policies have gradually returned to normal, and reform and opening up policies continue to be implemented. Marketization, legalization, and internationalization of the Chinese financial market are and will continue to be strengthened. The Chinese market including Hong Kong market is at low valuations, which is attractive for overseas investors.
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