About the "Fund Manager Window"

Star Stone Investment's "Fund Manager Window" partner livestream program has successfully held over 130 episodes since its launch in 2019, regularly conducting online livestream exchanges with partners. Star Stone Investment fund managers provide in-depth analysis and interpretation of recent market hotspots, promptly convey the latest investment strategies, and collectively address various questions from partners.

This Episode's Guest

The following is the livestream transcript organized by Star Stone Investment for your reference:

Q: The market has been quite volatile recently. How do you view the recent market performance?

Fang Lei: The market has currently emerged from a bull market trend, and there's little doubt about our judgment that we're currently in a bull market. Since it's a bull market, it will most likely follow the same bull market patterns as before. Although there are structural differences between bull markets throughout history, there are consistent patterns at both bull market beginnings and endings: at the end of bear markets and early bull markets, most stocks are at low levels with relatively high cost-performance ratios; while at bull market peaks, most stocks are expensive.

Looking back, although some stocks have risen significantly in this round of market activity, many stocks haven't risen much and remain very cheap. From a macro perspective, the transition from bear to bull markets generally involves policy reversals and fundamental realization, while bull to bear transitions typically also see policy reversals. Since the policy reversal in 2024, fundamentals haven't materialized, so we're currently still in the first stage of the bull market and haven't entered the second stage driven by fundamentals.

The current high market volatility is mainly due to severe structural differentiation - some stocks have risen significantly in the short term, creating pullback risks at the individual stock level, but there's no need to worry too much about the overall market trend. Taking the 2020-2021 bull market as an example, the overall market peaked in 2021, but many stocks actually peaked in the first half of 2020, indicating that individual stock rises and falls occur in sequence during bull markets. Therefore, we cannot rule out situations where some sectors have excessive short-term gains and their subsequent driving forces gradually weaken, with other sectors taking over.

In summary, from a major trend perspective, the stock market remains in an upward trend, and there's no need to worry excessively about short-term volatility.

Q: Some investors might compare this round of market activity with 2015. How significant is the risk of sustained market pullbacks?

Fang Lei: There was significant off-exchange margin financing in 2015, but current stock market margin financing isn't excessive, and leverage risks aren't substantial. Considering that A-share market capitalization continues to grow, it's normal for current margin trading balances to reach historical highs, and this won't cause the significant pullbacks seen in 2015 due to margin financing leverage collapses.

Looking forward, if we don't see fundamental realization for an extended period and capital continues to accumulate in a few high-valuation, high-growth sectors, the upward trajectory of some sectors will steepen, and market risks will indeed be higher. However, from the perspective of broad indices, the stock market remains at a relatively modest level without systemic risks. Therefore, even if theme stocks and popular sectors experience pullbacks, this doesn't mean the overall market is turning.

Q: If we count from September 24th, this market cycle has been running for nearly one year. How likely is it that the market will become a long-term slow bull?

Fang Lei: From the current market perspective, due to significant style differentiation in the stock market, it's difficult to reflect a slow bull rhythm at the industry level. However, industries rise and fall alternately, so for broad indices, the market may very likely move toward a slow bull pattern.

From a more detailed perspective, industry rotation effects are currently quite pronounced - when certain sectors rise, they do so aggressively, and correspondingly, their pullback amplitudes are also significant. Following the pattern of bear-to-bull market transitions, during valuation repair stages, capital seeks industries with thematic drivers or early fundamental recovery, and these sectors react more strongly. Subsequently, as policies gradually implement and the economy improves, pro-cyclical sectors will gradually emerge, and market styles will shift.

From September last year to now, overall macro fundamentals have remained relatively weak, so the market has stayed in the first stage of the bear-to-bull transition, with relatively ample stock market liquidity and capital continuously choosing industries with higher prosperity and better trends.

Looking forward, changes in macro fundamentals may differ from historical patterns. Previously, there were more aggregate policies with faster transmission effects, but now the domestic economy is in a transformation period, with policies focusing on technological innovation and other new economic drivers, making policy transmission slower.

Currently, overall inflation performance is weak, but some high-prosperity industries have already formed inflation effects, which differs from previous situations where policies focused on investment. Previous investment-focused policies had higher correlation with the general public, making economic improvements more tangible. However, technology transformation policies have lower correlation with the general public, so policy transmission effects will be slower, and the sense of economic improvement will be relatively weaker.

Moreover, real estate continues to drag on the economy with significant impact on the public. Against the backdrop of deteriorating household balance sheets, household consumption willingness has been suppressed, leading to improved prosperity in some non-cyclical industries while consumer industries haven't felt obvious changes.

Q: After market adjustments, will the stock market structure change?

Fang Lei: Currently, some industries have risen considerably, and some capital may want to switch from high to low positions. However, fundamental drivers for low-position sectors are relatively weak. The reason for low-position sector catch-up might be that high-position stock rises have driven up the market's valuation center.

When certain assets accumulate significant gains, valuations rise, making other assets appear cheap in comparison. For example, now that TMT sectors are rising, people find new energy relatively cheap and renewed their attention to new energy. So current sector rotation isn't necessarily a high-to-low switch but rather the elevation of the market's valuation center driving valuation repair in low-position sectors.

Low-position sector catch-up isn't due to fundamental changes in high-valuation sectors.

Q: With Fed rate cuts approaching, what impact will this have on domestic policy and A-shares?

Fang Lei: The Fed cutting rates by 25bp in September, followed by 1-2 more cuts, is quite certain. Although domestic policy space may be limited by the relatively large China-US interest rate differential, domestic policy remains primarily self-directed, with policies decided based on domestic conditions.

Current domestic challenges include: first, economic downward pressure; second, economic transformation and upgrading; third, overseas tariff changes. These issues all involve uncertainties, so policies need to observe specific situations rather than exhausting all tools at once. From this perspective, even if Fed rate cuts exceed expectations, the impact on domestic policy may not be significant.

Overseas factors' impact on domestic stock markets is mainly industrial - whether the Fed cuts rates isn't a decisive factor for domestic stock market trends. Moreover, the market has already relatively fully priced in Fed rate cuts. Overall, Fed rate cuts have a weak impact on domestic stock markets.

Q: How will fiscal policy exert force going forward?

Fang Lei: Current fiscal policy focuses more on addressing weaknesses, with fiscal efforts concentrated in areas with potential risks or downward pressure. From GDP data, first-half economic performance exceeded market expectations. Second-half overall economic growth pressure isn't significant, but there's internal economic structural differentiation.

We believe when aggregate economic pressure decreases, policy may focus on economic weak points like consumption and real estate. We're indeed seeing some longer-term policies being introduced, such as childbirth subsidies.

Future policy efforts will proceed from both long-term and short-term aspects: long-term refers to policies affecting demographic factors, while short-term refers to policies supporting immediate consumption, such as trade-in programs for appliances and automobiles.

Q: Does Fed rate cutting mean entering a weak dollar cycle? What impact does this have on capital markets?

Fang Lei: Currently, the dollar index has fallen to around 97, a significant decline. However, the yuan's appreciation is slightly less than the dollar's decline, mainly due to weak domestic demand and export protection factors.

Dollar weakness is quite clear. How far the dollar index will fall depends on two aspects: first, US money supply; second, the degree of dollar credit system weakening. Although some current US policies weaken dollar credibility, the dollar's global position remains very strong over the long term, so the probability of the dollar index falling below 90 may be relatively small.

Currently, dollar weakness is somewhat favorable for Chinese assets. From historical weak dollar cycles, emerging market assets generally perform well, and both A-shares and H-shares are currently in a relatively favorable environment.

Q: How do you view the recent yuan appreciation trend?

Fang Lei: We believe the yuan is currently undervalued, and it will continue to tend toward appreciation, but the magnitude and pace of appreciation require continued observation. From a broader perspective, China will gradually shift from external demand-oriented to domestic demand-oriented, with more balanced proportions of consumption and investment within domestic demand. If China transforms from a producing country to a consuming country, the yuan still has medium-term appreciation trends.

Moreover, as domestic technological breakthroughs continue and China's competitiveness strengthens, its currency status will continue to rise, supporting the yuan's appreciation trend. However, we need to pay attention to other medium- and short-term factors' impact on exchange rates, considering that export protection and other factors may constrain overly rapid yuan appreciation.

Q: Currently, H-shares appear to lag behind A-shares. How do you view their relative future trends?

Fang Lei: H-shares have simpler components, while A-shares have more pronounced sector effects, making A-shares appear to perform better than H-shares. However, their trends and directions are actually consistent.

H-shares and A-shares have significantly different compositions. Core assets in H-shares are mainly consumer stocks, dividend stocks, and internet companies. Many high-quality internet companies have already seen substantial gains. Both A-shares and H-shares exhibit structural differentiation.

If we compare A-share consumer stocks with H-shares, H-shares actually aren't performing weakly. However, H-shares don't include overseas computing power suppliers, so A-shares in this segment rose significantly.

From major indices, the difference between Hang Seng and Shanghai Composite trends isn't substantial, and their ultimate trend directions are the same. However, H-shares had greater valuation repair momentum in the first half of this year, and H-shares' obvious price advantage over A-shares has diminished considerably.

Q: How do you view potential US restrictions on Chinese innovative drugs?

Fang Lei: US policy suppression won't change the long-term positive direction of innovative drug fundamentals. Overseas pharmaceutical companies actually find it difficult to separate from Chinese pharmaceutical companies - this industrial trend cannot be changed through policy suppression.

Although US policy suppression may cause some short-term turbulence in the industry, from an industrial logic perspective, US companies purchasing Chinese innovative drugs actually benefits them because Chinese innovative drugs offer high cost-performance ratios.

When US pharmaceutical companies purchase Chinese innovative drugs, large pharmaceutical companies benefit while US biotech companies suffer - this is essentially a struggle between different interests. In terms of absolute strength, large pharmaceutical companies have significantly greater revenue scale, profit volume, and political influence, so subsequent lobbying by large pharmaceutical companies may make restrictions on Chinese innovative drug business development difficult to implement.

For the innovative drug sector, US policy suppression may impact investment logic because this year's innovative drug rally was mainly driven by business development transactions. Previously, some small and medium innovative drug stocks rose too quickly with high valuations. As the market returns to rationality, stocks with insufficient logic and weak competitiveness may experience significant volatility.

However, good companies with good products and those with relatively clear business development transactions still deserve attention.

Q: How do you view investment opportunities in anti-involution sectors?

Fang Lei: Current domestic economic fundamentals are relatively weak, and the market needs to find sectors with driving force for investment, so I believe investment opportunities still exist in anti-involution sectors.

Currently, sectors involving anti-involution have relatively low valuations. If the government clearly leads industry anti-involution efforts, industries will see valuation repair opportunities. As the economy gradually stabilizes, anti-involution policies may drive related industries to see prosperity bottom-out and rebound ahead of other industries, with potential for both valuation and fundamental bidirectional recovery.

Q: Is the current TMT sector overheated?

Fang Lei: TMT sector investment enthusiasm is currently high, but it's difficult to judge whether it's overheated. From a valuation perspective, AI sector valuations for this year and next aren't high, mainly due to overseas computing power demand growth and performance explosion under supply-demand mismatches.

Actually, many segments of the overseas computing power chain don't have high technical barriers - it's just that new capacity can't be expanded now, so overseas demand explosion has created relatively obvious supply-demand mismatches.

Looking forward, as new capacity expands, the industry may find it difficult to maintain high profit margins. Combined with accumulated risks from stock price rises, subsequent TMT sector investment requires caution.

Q: How do you view current government bond performance?

Fang Lei: Government bonds have indeed fallen considerably, but equity assets are still in an upward cycle and still deserve attention.

Although some equity assets aren't cheap now, overall equity assets aren't particularly expensive. For example, some consumer growth stocks have valuations below 20 times with decent dividend yields, achieved during low industry prosperity, so risks for these equity assets are relatively small.

Q: How do you view investment opportunities in the new energy sector?

Fang Lei: Recent new energy company rises are actually results of technology stock valuation center elevation. Currently, China's leading new energy companies have strong competitiveness globally, but previous market concerns about new energy overcapacity suppressed valuations. As new technologies develop, the market is re-pricing the new energy sector, creating valuation re-evaluation opportunities within the sector.

Current market style involves: first, valuation repair; second, thematic speculation. Current speculation atmosphere is strong, so new energy sector speculation focuses on companies without institutional holdings and uncertain long-term technological prospects.

However, essentially, leading companies have higher probability of new technology realization, so subsequent valuation repair for leading companies will be more stable.

Q: How do you view investment opportunities in service consumption?

Fang Lei: We've already seen policy efforts regarding service consumption. I personally lean toward service consumption stabilizing in Q4 this year or early next year, with better performance in some sub-sectors.

Current consumer industry bottlenecks lie in real estate cycle downturns and housing price declines, so service consumption's endogenous momentum repair may need to wait for housing price stabilization.

However, from a listed company perspective, leading companies' performance is significantly better than industry performance, so leading company performance will also precede the entire industry. Leading consumer companies are in positions with superior investment cost-performance ratios.

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