A-share market was steady at the broad index level, with CSI 300 dropping 0.46% and amplitude of 4.97%. Under the surface, market was occupied with ChatGPT/AI related concepts – relative sectors turnover were as high as 50% of the total market turnover. It is not a surprise that AI would become such an eye-catching theme this year: AI’s breakthrough has given a revolutionary impression, which could be translated to investment opportunities. On the other hand, sector rotation is still preoccupying the majority of the trading trends in the market, where we see sectors that were heavily invested by institutions with better performance see bigger retreats. Another theme that we see continuous inflow is value stocks with high dividends, whereby prices are gaining in a much slower pace as compared to other hotter topics. We would spend more time looking deeper into the topic of ChatGPT today.

But do recall March hasn’t been a quiet month at all, especially in the banking industry– Silicon Valley Bank, ranked 16th in US banks, filed for bankruptcy after its record loss and failure in raising additional capital. Clients fled from the custodian with 42bn USD flocking in one day, and ultimately taken over by FDIC and announced its closure on March 10th. SVB’s story ended within 48 hours, triggering concerns and worries of clients and market. Signature Bank closely followed SVB’s shoes on 12th March, but with the FED rolling out a new financing instrument BTFP, its stance has clearly changed from tightening back to loosing. But then Credit Suisse drops a larger shocker to the world – the 166 years old bank was taken over by UBS with a 3 bn Swiss Franc cost and writing off 17bn USD of AT1 on March 19th. Despite the fact that US and Swiss regulatory bodies acted swiftly towards the crisis, we are keen to believe that this could just be the beginning of another crisis in the financial systems.  

Other foreign affairs include – Saudi and Iran renewed ties after 7-years of rift on the 10th; Brazil announced the direct settlement with China using Renminbi on 29th (Brazil is China’s 9th largest trading partner while China is Brazil’s largest trading partner). OPEC second largest producer considering to use Renminbi as settlement currency for private companies (later OPEC’s decision of cutting daily production by 1.66million barrels shocked US); ASEAN held a meeting in Indonesia to discuss the replacement of major settlement currencies with local currencies; Finland joined NATO as the 31st member. Clearly, we are seeing some changes that could speed up the internationalization of Renminbi.

Problems we see in the US

Trump’s trial is not only the first ex-president to face criminal charges, but also indicates how bipolarized the political landscape US is. Since 2008, all Fed chairmen has maximized the MMT theory and especially Powell pushed such theory to a next level during COVID. Low cost for M&A, capital markets become more active due to the abundance of funds, subsidies granted has helped the street but also lifted inflation pressure; Biden government has introduced loosening policies to industry and capital markets, including direct subsidies into semi-conductor and new energy industries, infrastructure spendings to encourage employments to return to America. Unemployment rate is lowest in 69 years, with the cost of highly uncontrollable inflation quietly approaching – Fed underestimated the consequences of protectionism. Together with an aggressive and expansive monetary policy to boost economic activities, inflation came in hard and uncontrollable in 2021. While in 2022 the Fed tried to reign in the rampaging inflation by quickly tightening its money supplies, the capital markets was not prepared for such a rapid rate hike cycle. All financial institutions have suffered from such acute change and were unable to reallocated their investment holdings properly. SVB, Signature Bank, First Republic … all these are not cases of coincidence or malmanagements: while bigger banks would have better liquidity management, smaller banks would suffer more than ever. While the BTFP is helping the industry to catch a breath, The Fed is now facing to strike an almost impossible trinity among inflation control, economical support and stabilizing the capital markets.

Another unexpected consequence between the Russo-Ukrainian conflict is the urge for settlement with local currencies. After banning Russian from the SWIFT systems, political leaders from almost 60 countries are now preferring the settle their trades with local currencies to lower the risk of their counterparties being rule out from traditional settlement currencies like Euro or USD – CNOOC completed its first LNG transaction with French Total based on RMB, Saudi’s cabinet agreed to join the Shanghai Cooperation Organization, Russia prepared to use RMB as its third settlement currency, India and Malaysia agreed to settle with Rupee with UAE are also discussing the terms of such trade settlement for non-fossil fuel products… even OPEC ignored US’ demands and lowered the production, bringing more pressure to US to contain the inflation pressure. And the way how the Fed has been pumping liquidity to help American corporations is eventually asking all USD holders to pay for the price later (could be the reason why Gold prices has been performing so well). The US government is also facing problems on protectionism via higher tax to bar China’s exports, controlling inflation and loosening subsidies to corporations.

China has been taking a more prudent approach towards its monetary policy, and after years of managing the risk and deleveraging the gearing, of course it doesn’t mean that we are not affected by the dampened real estate and financial markets during the past two years, but comparatively speaking, China is seeing the light in the tunnel while US is just barely entering one.   

How should we treat ChatGPT/AI? Engage or Disengage?

The latest theme in A-shares market has to be AI concept, with the latest market joke saying that there’s only 2 types of stocks, those that rise with AI, and fall without. Based on some sell-side statistics, GPT related themes traded over 600 bn RMB turnover for a single day, or more than half of market total turnover. While fundamental research believers think that this is just a gimmick without substantial earnings support, trend-followers or thematic investors strongly believe that this is a theme of a decade. Many sell-side researches have published comparisons of with the mobile internet industry back in 2013. The study shows that, , during the mobile internet thematic investment era, many stocks were up 10x while the best performing stocks in ChatGPT era are only up 3 folds which might indicate a long way ahead.

Our own in-house research has placed much effort into understanding the topic. We agree that ChatGPT is undoubtedly a milestone development for artificial intelligence in human history. Not only it has refreshed our minds of AI capacity, but also shocked the world with its revolutionary speed in GPT4. Together with some other big data model, the application of AI could bring revolutionary changes to traditional industries. We do not believe that AI is a pure thematic bubble for investments, but lies a very feasible market trend for upgrading traditional industries. Just like how mobile-internet has changed many of our habits, we believe AI+ is likely to bring new impacts to our patterns.

Back to the stock markets. The first round of AI market leaders were mostly from overseas and Chinese investors might find it difficult to invest. Meanwhile, those that possess the possibility to benefit from the segment, finds hardly justifiable valuations from its current fundamentals. This has mostly pushed investors to the sidelines.

Maybe this is the investment cycle we face: back in tech bubble in 2000, mobile internet in 2013 or Electric Vehicles in 2019, every time when a new investment topic comes, the first rally always come from investors with most sensitivity towards news. At this stage, it is hard to tell if it’s a growth company or a growth in sector. We are more keen on the logic where such rallies are driven by sector investments, and real market leaders would only emerge after the bubble bursts -- just like how in year 2000, the only company that stood out was Amazon, and the rest were slowly developed.

For trend/momentum investments, it is impossible to miss out on such a wave of investments. But if you are a long-term fundamental research based investor, your investments would be tragic if you decided not to hop on the wagon at the beginning, but were forced to join later. We ran through some internal analysis based on 2013’s mobile internet bubble -- for those stocks that rose 10x, we did not participate into anyone of them, nor were we affected by their later downfall in stock price. However , Rabbit Fund still achieved satisfying investment results in 2013 and 2014. At the end, we have to have conviction in our long-term investment strategies. The AI segment to us seems overheated.

It doesn’t mean that we would not invest into AI sector, but sticking with what we do he best (selecting the best company in the right industry) is our key to success over the years. We can only be better by thorough research. We would only invest into great companies, but not great potentials or stories.

Recent A-share outlook

While we think that AI-related segments have been too hot recently, it is still a good thing for the capital market to have a consensus and money-making for investors. This bubble effect will ripple out and radiate into other sectors or themes with potential, increasing the overall investment sentiment as a result. Such has been seen in 2013 and 2019, just the sectors could rotate from tech to cyclicals to internet, etc.

In addition, we continue to see investment opportunities in valuation stocks with high dividends. We would maintain a rather neutral investment stance to observe the overseas market evolve, focusing out bottom-up research efforts and also evaluate the investment potentials like Gold prices.

WU Weizhi

April 5th 2023

本期《偉志思考》簡體中文版鏈接：

伟志思考：百年大变局加速发展中！ 如何看待GPT热潮？该拥抱还是远离？