Minority AM Liam Zhou: How to determine market prices for next year?

Liam Zhou   2019-12-31 本文章82阅读

As the year end approaching, investors often asking “what do you think about the market performance next year?”


We can also see a great deal of media coverage, predicating the ups and downs for 2020 stock market. Many people believe they have the ability to foresee market trends. However, those are more likely cognitive bias of self-attribution and over-confidence.


Rose 36% in 2019, the CSI 300 index had its best annual performance in past five years. How many investors really anticipated such good run at the beginning of the year?

We analyzed stock position of China equity mutual funds in early 2019 and found out that the overall position at the lowest level since Q1 2016, indicating a pessimistic view in the market. However, it turned out to be a bullish year.


Why most investors are making wrong prediction?


On one hand, expectations of majority investors already reflected in the stock prices. The stock market is a complex system made of various investors and stock price react immediately to changes in expectation. At the end of 2018, many people were pessimistic towards the macro economy, U.S.-China trade conflict, growth of private sector etc. However, since the market had already reflected the expectation, stock prices were already at low level.


(Please refer to our previous year article “Is 2019 a risky year?”)


On the other hand, things may affect the stock price not yet happened, and they are unpredictable.

In early 2018, people didn’t know that the U.S. would increase tariff for China goods. In early 2019, people didn’t know that foreign capitals flow into China A share with such a determination, neither did people know U.S. and China would make a trade deal. People hardly knew that Huawei could maintain its growth at fast pace. People cannot predict when and what would happen and to what extent. 


The source of our excess return is from the majority investors that making wrong predications. When stock mispriced, provide us good opportunities to invest at a high risk-return ratio. 


The blue-chips maintained strong trend for three and a half years. We believe, the blue-chips will keep upward for several years. With 33% rise in 2019, the SSE 50 index reached a new high for the past 11 years. If we count it from the second half of 2016, the blue-chips cycle kept its momentum for three and a half years.


We believe the blue-chips cycle will stay strong for years, not just because they have good fundamentals and low valuation, but more important reason is majority bias towards blue-chips still not corrected. We observe those bias in many aspects such as supply and demand, scarcity of stocks, allocation, valuation and market sentiment. Bias being corrected gradually and far from completion.  


Among the majority bias, we find our investment direction.


What we are looking for is not the stocks with most upward potentials, but the best risk-return ratio investment opportunities. When the tide rising, everyone is making profits. In many cases, more aggressive one gets more return. However, we always need to keep in mind the amount of risk taken to make such return. Only when the tide ebbing, people will be able to see if too much risk was taken. We are looking for investment opportunities with limited downside risk and high potential to rising.


With strong performance in 2019, Minority not only achieved good results for six consecutive years, but maintained beta below 1 and high alpha. In 2018, when the market tumbled, our loss was only half of CSI 300 index. When the market went up in 2019, we are one of the top performers for China private funds with AUM over 10 billion RMB.


We will continue our investment strategy of “investing in blue-chips and actively participate in IPO placement” in 2020. We made small adjustments to our portfolio in 2019 by adding position in real estate stocks. We will continue to hold large blue-chips stocks in banking, real estate, insurance, liquor, and manufacture sectors. If the market condition stable, our investment strategy would remain.