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- [00:03]
A
Hello everyone. Welcome to the Julius Baer podcast. This is Richard Tang, the China strategist and Head of Research Hong Kong for Banjo Spare. It's great to have Hong Hao with us again to discuss the outlook for the Chinese market. Hao is a renowned economist and he's also the Managing Partner and CIO of Lotus Asset Management. Hi Hao, thank you very much for your time speaking with us today.
- [00:28]
B
Hi Richard, Great to be here.
- [00:30]
A
Today is June 16th and yesterday the US and Iran announced a peace deal earlier and the Strait of Hormuz should reopen this Friday by the agreement. Oil prices dropped quite sharply yesterday in response to this headline. Meanwhile, Asian equity markets were rallying yesterday across the board. Not surprisingly, Japan and South Korea led the gains. As for the Chinese market, it continues to show strong divergence in performance similar to the pattern that it has shown over the past six to nine months. Specifically, the Hang Seng Tech Index in Hong Kong has fallen by 14% year to date, whereas the China's index in Shenzhen and also the Star50 index in Shanghai have gained around 24 and 28% respectively. And that's a shocking difference because that yields around 40 percentage point of difference in performance. Now I think we all agree that the key reason for this is, is simply that the Hang Seng Tech represents all tech. We have Internet EVs, smartphones in the index and then the Chinese and Star indexes represent new tech, which are mostly the AI infrastructure stocks that have clearly attracting the bulk of money flows. Now let's discuss the weak one first, which is the Han Seng Tech Index or more broadly the Hong Kong market. I think the reasons for the underperformance are quite well known by investors already, which include the drag from intense competition in the food delivery sector, the drag from the weak consumer sentiment in China, as well as concerns about the competitiveness of these Internet giants in AI space. Now, all being said, I think everything should have a price, right? So I think it's fair to argue that a lot of the negatives are already priced in after such a large decline. But I don't want to ask for your opinion. How does every dog have his day? Now, do you think there is potential for at least a short term rebound in the Hong Kong Internet stocks or do you think otherwise? Do you think investors still need to be patient? Which side are you taking?
- [02:30]
B
There could be a short term rebound, but I think that is not the main focus of our forecast because if there's a short term technical rebound and then it goes lower after the rebound Then it makes the trading very difficult, especially for retail investors. And also if you look at the Hong Kong economic cycle or the Chinese economic cycle, it's still in a deceleration phase. So we probably still have another three to six months to go before this deceleration phase exhausted. If so, then it's better to stay on the sideline and just watch. I know that some people want to catch a technical rebound here and there, but because the general trend is still decelerating, is still heading down, then it's difficult to trade against the main trend unless you're a very good trader. I do think that because the index is so oversold there could be a technical bounce here and there. But I would advise against trading this kind of technical rebound because it's going to be very difficult.
- [03:27]
A
You just mentioned about the weakness in the Chinese economy. That might have also to do with the Internet and the broader technology sectors because when it comes to Internet stocks, e commerce ev, they actually are quite closely linked with the economic cycles in China. I guess the question from a lot of global investors right now is why isn't there more aggressive a step up in stimulus measures to the economy like what the authority used to do when the economic cycle was turning south. What's your feeling on that? What exactly policymakers are thinking now?
- [04:03]
B
I think it really depends on which way you look at it. If you look at the China export and the star 50, so assuming that the AI related and tech related sectors are doing exceedingly well, if you look at the Chinese semiconductor export for example, it's up 50% year on year. If you look at the high value added manufacturing goods, it's up very high double digit year on year as well. So these sectors are doing exceedingly well. So the export sector of the Chinese economy is doing very well. So I think at this rate we're going for record face surplus again this year. But then at the same time you seeing the traditional old economy related stocks are doing very poorly. So for example the old industrial output, also the industry value added, they're showing very low single digit growth. So showing you that this part of the economy is lagging and because this is still the majority of the Chinese economy and therefore the overall picture seems to be gloomy. I think people look into the future as the tech sectors continue to grow, its composition, its weight in the overall economic composition are bound to increase. And therefore after a few years I think the Chinese economic structure could look very different from today. So I think you know, people need to be patient and also policy makers are very patient as well. It avoids overstimulating the housing sector. But then at the same time for all the money that we created, we put into the non real estate related sectors. So if you look at the PBOC balance sheet this year and the correlation between the PBOC's balance sheet and the 10 year treasury yield in China since late 2022 and early 2023, the two actually have been diverging. Now what that means is that the newly created money has been going into stocks or has been going to sectors other than Chinese real estate. So the Chinese real estate price continue to trend down as you can see in today's real estate pricing series. So in the month of May it's actually decelerating further from April. But then at the same time because of all the money is going into the new industry, the Four Little Dragon, right? So EVs and new energy and semiconductor and higher manufacturings, those sectors and those stocks are doing exceedingly well. And so you're seeing a clear divergence between where the pboc is expanding its balance sheet and the trending down of the Chinese 10 year treasury yield being affected by the property price. So I think this trend will continue. I think it's the most conspicuous picture of the Chinese economic restructuring. So on one hand we're still creating money, but then the money is going into newly minted industries, high growth industries and high value industries. And then on the other hand, because of the lack of support by liquidity, the Chinese real estate price and transaction volume continue to trend down. So I think this is a very good picture to explain where the Chinese economy is heading in the coming future.
- [07:05]
A
Indeed, the Chinese economy is K shape, similar to what people talked about in the us K shaped economy and we have K shaped money flow and now K shaped stock.
- [07:16]
B
That's right, everything is K shape.
- [07:17]
A
Yeah, exactly. Unfortunately, like when other markets are K shaped, the stronger end is taking a larger part of the economy and that's why the mainboard indexes were going up in China. The case was opposite where the stronger part, the AI related stocks were much smaller in the mainboard indexes. So we're not seeing as much help from these guys. But in any case, if we move on from the weaker segment to now talking about the stronger part of the market, obviously that's Asia attack because these stocks had fairly remarkable run over the past year. Most of these AI infrastructure sectors, basically they were taking turns to rally. We have optical communications, we have pcb, semiconductors, memory, so and so on. I don't know if our audience has noticed, but the largest constituent of the CSI 300 index is no longer CATL. It has been replaced by a stock in the optical communications segment. And interesting enough, last week one US ETF issuer were submitting to the regulators to try to launch a few leverage ETFs on a couple of these Asia tech stocks. Now, obviously we are not here to discuss individual stocks in the podcast, but I bring this up because I do think some investors argue that these kind of developments usually are signs that the market is getting frothy. And this may indicate that we are closer to the end of the rally. Now, I think this is where the question comes in. How do you think we need to be more cautious on the AI rally in China?
- [08:52]
B
I think if you look at the Chinese semiconductor names and Hong Kong semiconductor names, and also the US and Korean and Japanese semiconductor names, they're all moving together. So within the semiconductor industry, monies are rotating from one sort of a subsector to another. So pcb, cpo, cpu, GPU and then memory chips. So they're rotating and rotating. Basically the strengths still remain in the semiconductor industry. There's really no need to separate between markets because the global semiconductor names are all moving in synchronization. It's just which one is rising faster and which one is slower. So I think for China, obviously the semiconductor industry is one of the key growth driver identified by the government. The Chinese government just recently announced, you know, spending hundreds of billions of yuan in the next five years to build up the industry and also to help R and D spending in the industry as well. So I think as a result one could expect that the trend will continue. And also just now we mentioned that the fundamental in the semiconductor industry is still very strong. Earnings growth is still very powerful, the demand is still very rapidly growing and the company is giving very upbeat guidance. And all of these are being reflected in the stock price. Now, having said all that, the definition of a bubble really is that the price rising so fast that it strayed away from the fundamental. So this is a classical definition of a stock market bubble. If we use this definition to look at today's market, you can see valuation is astronomical. Some AI names is trading at 1000 times peak price of sales. So basically you have to wait 1000 years at this rate to get back your money and the company has to take in the sales, but then not registering any costs and expenses, which is impossible. I think this is probably one of the highest price to sales ratio I've seen in the past. Decade. So you keep seeing valuation such as this, it's distorting the entire market valuation. And if you look at the US naj for example, they're trading at a very high multiple as well, even though it's much better than the Chinese names. Now some people will say that, well, trying to explain this away by saying, wow, this is very different from the 2000 year 2000 DMT bubble because back then those companies don't have earnings, therefore you can't calculate pe. But right now many of these companies have earnings and earnings are growing very fast and therefore even though the valuation is high, it's okay, Right? So some people will try to explain away by doing so, but then clearly there is an admission that valuation is already very high. So at this stage, if you're not a trader, if you want to allocate your money for the next couple of years, would you buy at such high valuation that almost guarantee a very suboptimal return in the coming years? I think very few people would do that. I think many people are still having this trader's mentality, right, trying to evaluate the gain and loss of the positions every day. So they believe that even though this is a bubble, but there's a very strong fundamental support and therefore if there is a correction happening, they can run faster than their peers, right? So you know, when, when a bear, the joke goes, you know, when a bear is running towards you, as long as you can run faster than your friend, then it's okay. Your friend would get eaten by the bear, but you can escape unscathed. So I think, you know, there's hoping to get lucky kind of mentality that is going on in the market. And also as you can see, every time there's a correction then people would be worried that oh, maybe this is the top. So every time there's a rally then people will think that, oh, I should have bought more. So it's this kind of mentality that is really driving the entire market and create lots of volatility. You know, we're at stage where we're going to see increasing volatility in the market in the coming months. So at this juncture, I think even though the market can squeeze new high, but the accompanying volatility is going to be surging. So it makes traders life very difficult. It makes it very difficult to hold onto your position and makes it very difficult to bet big, putting sizable bet on your position, you know, on these ideas. So I would say that yeah, people should take it easy. I'm pretty sure that Many people have made quite a bit of money this year. So I think if that's the case, we'll probably take some profits and sell into the rally.
- [13:32]
A
Very interesting because compared to the past few months, I think this is the first time how you probably have become a little bit less optimistic on the market. I think that's.
- [13:41]
B
Yeah, yeah. Richard, maybe let me explain this key difference between a double burst, meaning that the index has reached a peak that won't be able to repeat in more than a year, let's say. So that would be one way to say the bubble has burst. But then we can also say there's a sizable correction. Sizable correction means that from a very high index level there's a correction that is more than 20%. When that happened, then it will make it feel as if the top is not repeatable in the near term.
- [14:10]
A
Right.
- [14:10]
B
Yeah. So that means it's a sizable correction. And also, even if there is a sizable correction in the stock market, and even if there is a stock market bubble burst, it doesn't mean that the fundamental would go sour very rapidly and the economy is going to fall into a recession. It doesn't actually mean that. So it just means that the market has to correct its excessiveness in the coming months.
- [14:33]
A
Yeah. So sizable correction is a key term to summarize your view here. Yeah. At Julia spirit, we would also not be surprised if there will be some volatility ahead. We did note that there's more animal spirit in the market, basically across the globe. For now, I think we are a little bit more optimistic. We think in the long term we willing to ride on this AI trade a little bit more. But I think one thing that is very interesting that how you just mentioned, which is that all these AI traits, particularly the semiconductor names that you mentioned, they were all moving together. So I think that raises a question of what is effective diversification because at Julius Bay we always talk about diversification. I think that's the key for asset allocation and how you grow your wealth without taking too much risks. But I think the problem right now is first you have AI infrastructure trade in the US and you thought you were diversifying by holding some Korean stocks, Japanese stocks, Taiwanese stocks, or even the Asia China stocks. And it turns out they are all moving in the same direction.
- [15:35]
B
Yeah.
- [15:35]
A
So I think the diversification is actually a bigger risk in most of our investment portfolio, most of our stock portfolios that we really need to think about. And then the other question that I do want to ask for your opinion is when it comes to Investing into AI. Frankly, there are more opportunities in the private space rather than the listed space. And these private companies recently are now coming to the public market. And that's true both in China and the U.S. they're trying to capitalize the current AI frenzies by going public. We just witnessed the largest IPO fundraising ever last week in the US with the listing of SpaceX. And in Hong Kong, IPOs have even gone back further to the beginning of last year. And even though a lot of these probably are different in nature because they are more about a share companies getting dualisted in Hong Kong, but in any case, they will suck money out of the market. My question is, are you concerned that the current fundraising may have some liquidity impact to the markets, be it in China or in US or both?
- [16:44]
B
I think the impact is already quite conspicuous in Hong Kong this year. Once again, it's a record IPO year for Hong Kong after a very successful 2025. You know, once again, the money being raised in Hong Kong is one of the highest in the world. So I think as a result, this is a better year for Hong Kong IPO market once again. But if you look at the Hong Kong stocks, right? So at the beginning of this conversation we talk about how badly are the Hong Kong stocks perform. One of the key reasons besides a slowing economy is because the IPO market is sucking away liquidity from the secondary market. So I think as a result, this year, if you are bunny, you know, you do the IPO lottery and you know, you participate in every single IPO and then you would have a very decent year to date return. But then if you participate in the secondary market, even if some of the very old classic investors favorite, they're performing very poorly this year. So that is telling you that in Hong Kong, the divergence or the impact from IPO is very obvious on the secondary market. And I think for the US market, this would be the first year in the past decade where you have the stock market taking money away from investors by ipo, then giving money back to investors by dividend and also by stock buyback. In the past 10 years, more than 10 years actually, stock buyback has been one of the key drivers for EPS growth. So every single year, the stock market give back more capital to investors than it takes from them. So as a result, the US market has been in a long term bull market for a very long time. So I think this is a key difference between the Chinese and the US stock market. The Chinese market keep taking money away from investors It's a financing market where the US market is a capital return market where you invest in this kind of market. And then every single year the stock market gives you some of your capital back. So it's a very decent, very conducive market environment for a long term bull market. But then this year things starting to flip because of the fervent IPO activities. You know, the money the market is taking away from us, this is turning positive, meaning it's taking more money away than giving back. So I think as a result we're already seeing the market breadth in the US is narrowing. Right? So if there's more than enough money, then everything should go up in the same time rather than only a small bunch of stocks that is rising. So if you look at the advance to decline ratio, for every one stock that is increasing in price, then there'll be like three stocks declining in price. So the market breadth is very narrow. And also the market leadership is concentrated in a handful of memory chip stocks and semiconductor stocks. So this is a very uneven market. It's a one sided market, the strong getting stronger and the weak getting weaker. So it's not healthy. So I would say that the IPO impact on the US market is also being felt by the broader market. In the coming months there will be a couple of other huge IPO coming on stream as well. Entropic and also OpenAI, just to name a few. So this year the money being raised by IPO is already bigger than the entire sum of money that is being raised by the US market in the 1990-2000 in the 10 years of TMT bubbles. So that is telling you that the IPO activity is crazy then its impact bound to be felt by the broader market.
- [20:25]
A
I see. I think you mentioned one thing that resonates with us a lot at Juhosphair, because we always been saying that the US equity market is like a cash machine. So we definitely have to monitor whether this cash machine fails here to determine where the market is moving next. But if we move on from equities to another asset, which is gold, I think that gets us another very interesting topic to discuss today in the podcast. Like how both you and I have been talking about gold a number of times in this podcast series and unfortunately gold is arguably the other disappointing asset this year besides the Hong Kong stock market. I think to some extent the US Iran war has something to do with the disappointment because the war basically drove high oil prices and in turn drove higher market interest rates. And obviously almost by first principle that will hurt gold prices. Now gold price has already fallen below 4,500 mark. I think looking forward, we at Julius Bear believe that gold prices in the near term still depend on the interest rate moves. But over the long term we still think central banks would buy gold to diversify their reserves, particularly from the dollar. So this trend will remain unchanged. However, I think the question for you today how is if oil price drops further after this peace agreement, could this help support a rebound in gold prices in the next few months?
- [21:54]
B
I think there's a technical rebound that is already happening. It's a rebound that is on a daily sort of candlesticks scale. So meaning that it's a technical counter trend rebound. I think the broader trend is still trending down because gold has such a spectacular move at the beginning of this year. So I think with the price momentum being so strong back then, it actually takes a little bit of time to digest all of those increases in a very short time span. So I think GO is having a technical counter trend rebound but then I think its downward pressure cannot be exhausted so quickly. So we still need a little bit more time for gold to pick up the pieces, consolidate and stage a major uptrend. So I think, you know, having said that though, we're still very bullish on gold, right? So you know, a technical trading view is not contrasting our sort of overall bullish view on gold. This is because for us gold is a faith, a sign of credibility. Only gold is the real money, everything else is credit. That is according to JP Morgan, which I totally agree. So as such as you can see, as gold price continue to fall, the pboc, the Chinese central bank continue to buy more. So I think many other central banks are doing the same. So with the US debt crisis still developing, the credibility of the US dollar is eroding in the long term. I think gold is a necessity in everyone's portfolio allocation for the long run. So I think right now we need to be a bit more patient. Even though I wish I could call that this is it, let's go all in for gold. I think it's still a little too early. Right now we're having a small technical rebound to probably 4,500 ish plus and then we'll turn back down again. So I think people need to be patient. But I think after a few such rally and decline and then rally again, gold would probably exhausted its downward pressure and then start to trend up again from there.
- [23:52]
A
I think we have pretty much the same view here at Jules Bear. It does look like 2026 will be a year of sort of volatility in gold prices without clear direction. But hopefully some point next year in 2027 we'll be able to restart a new uptrend because we believe that the central bank buying thesis remains valid.
- [24:13]
B
Yeah, probably we will revisit again in September, October. Ish. Hopefully we'll get a turning point there. But if you look at today's gold price, it's about 4,350 4,400. It is a single digit return year to date, so it hold gold from the beginning of the year. You're not doing too poorly, you're not losing money. At least that's a relief. Let us be patient and wait for a major inflection point. Then we'll get ultra bullish on gold again.
- [24:39]
A
Okay, so let's keep fingers crossed for gold. That's pretty much all we have to discuss today. Thank you very much Kyle for your sharing. Ladies and gentlemen, thank you for listening and stay tuned for our next podcast. Goodbye and speak soon.
- [24:52]
B
Thanks Richard. The information and opinions expressed in this podcast constitute marketing material and are not the result of independent financial or investment research. Please refer to www.juliusbear.com legal podcasts for further other important legal.