As the year end approaches, the stock market continues downward, even blue-chip stocks start correction. The gloomy prospects of trade conflicts, the suppressed domestic consumption and falling GDP growth rate, making many investors feel that 2019 will be a risky year and start to cut stock position and leave the market. Is it right?
Most research only focus on possible risks in 2019, without considering the market already responded to those risks. According to efficient-market hypothesis, the stock price has contained the available information and mass expectations, and reflected all investment decisions. People's pessimistic expectation for the future has been reflected in the market downturn. When the market is depressed, there are countless reasons to be bearish. But in fact, the downturn in the market has reflected the pessimistic expectation of most people. The falling share price has already contained all negative impacts.
It is the change in expectation, not the expectation itself, that affects the market. When Market expectations become more pessimistic, the market falls. And market expectation recovers from over pessimism, the market rises instead. So pessimistic expectation itself is not the reason for the decline, but the change in expectation.
After a long depression in the market, expectation tend to be over pessimistic. Such as neglecting the positive news and emphasizing the negative news. Recent market reflects this characteristic. The market plummets on negative news but doesn’t rise on positive news. The US market up, we not up. The US market down, we down. Recent Central Economic Work Conference 2019 has identified several key stimulus including deduction of personal income tax, acceleration of 5G commercial use, reform of rural land system, and settlement of 100 million people in cities by 2020. All of those are positive news in the bull market, however, current market has no response. When market sentiment recovers from the current over pessimism, the market will rise.
When the market is extremely pessimistic, the risk is very low. In retrospect of the market cycle, is the risk high when market is extremely optimistic? Or when market is extremely pessimistic? In fact, the risk is quite high in the second quarter of 2015, when the market is extremely booming and optimistic, not when the market was extremely depressed and SSEC index was around 2000 points in 2013.
When the market is downturn, it requires great psychological strength to continue hold high positions as human nature is tending to escape psychological pressure. When each bear market comes to an end, it is the most pessimistic time and most investors have lowest position. But at the same time, the market risk is lowest and investors should hold high positions. As asset manager, we should bear great psychological pressure of high positions.
No one knows when the market will bottom out. Because no one knows the future. Will the China-US trade negotiations be successful on March 1? What economic policies will be implemented next year? Will we effectively alleviate the downward pressure of the economy? How will the WTO system change? These will happen only in the future and will have a great impact on the stock market. Therefore, the stock market is not easy to predict.
We know that the return to risk ratio of blue-chip stocks is very attractive. The downside risk of these blue-chip stocks is very little, and the upside is much higher in the next year or two. Based on our research on supply and demand, scarcity, allocation, valuation and market sentiment, we believe that the bullish cycle of blue-chip stocks will continue for several years. Although blue-chips also declined this year, they have a much smaller drawdown compare to CSI 300 Index and small-medium cap index and remain strong in general. Our investment strategy has not changed, and we will also pay close attention to the short-term downside risk and carry out tailored risk management measurement for different products.
We are confident in our market-proven investment methodology, our holdings, and the future of China. In retrospect, the losses are temporary, and our NAV will always hit a new high. When others lower their positions and stay away from the stock market, we should be confident and be the contrarian.
We wouldn’t miss the spring, although it could be late. In the cold winter, we encourage each other and wait patiently for flowers to blossom.