The strategies of investing Private Funds in the second quarter of year 2018

Private fund stock strategies: A share market showed some sign of stabilization after the slump in Q1 and it could offer the opportunities for both growth stocks and value stocks investments.

1. First quarter’s stock market review:

Look at the first quarter, by the end of march 2018, Shanghai composite index closed at 3168.90, CSI 300 index closed at 3898.50, SSE SME Composite Index closed at 10960.15 and Growth Enterprise Market Composite index closed at 2277.42. Horizontally compare these indexes quarter on quarter, different indexes appeared different performances, Shanghai composite index fell by 4.18%, CSI 300 fell by 3.28%, SSE SME Composite Index fell 3.35%, yet Growth Enterprise Market Composite index successfully turned around the falling tide and ended up with 3.41% growth.

In general, the entire January, A-share market had two most obvious features:

The first feature is increased volatility on A-share market, as well as increased uncertain factors on the global market for A-share market. Even though, for the entire first quarter to speak, Shanghai composite index did not fall too much, but within the quarter, the volatility of the index was 15.85%. Last time when the index had such a large volatility was the first round of the stock disaster in 2015. The first unusual move appeared at February 6th, Shanghai composite index fell 9.60% in a single week, from one of the aspects to say, which is partially related to the influences brought by global stock markets, especially from the over 1000 points drop on Dow Jones Index from February 6th to 8th.

From another aspect to say, the appearance of the 9.60% drop is related to China’s financial de-leveraging and capital management plans for lowering leverage, new regulations on equity pledge financing and some other questions bedding in stock market itself, such as “finance bombs” of LETV or other public companies. Second unusual move appeared on March 23rd, it was triggered by China-U.S. trading conflict. Trump, the president of United States, signed a memo, based on the section 301 of the U.S. Trade Act, to investigate on Chinese Property policies and practice. Approximately 60-billion-dollars’ worth of Chinese goods could get involved into the extra 25% custom-tax payments asked by U.S. government, which is about 15-billions of dollars. Meanwhile, U.S. government clearly mentioned that about 1300 kinds of goods will be taxed, which includes aviation, modern railways, new-energy vehicles and other high-tech products, etc. Also, the good list will be pressed in 15 days, under this circumstances, China-U.S. trading conflict dramatically heated up and the stock markets of both countries steeply dropped. The Second feature is those big blue chips, which represented by SSE 50, took hit. However, those growth stocks, represented by SSE SME Composite Index and Growth Enterprise Market Composite index, presented a “V-shaped” strike back.

Since February, small- and mid- cap growth index was in a decent rising trend, several stocks continuously performed strongly. From the market opinion to say, one side, after a two-years back-to-back fall of small- and mid- cap growth index, majority of stocks dropped dramatically, which on arbitrage’s view can be considered as “they look cheap”, and also annual reports pressed and exposed those “shocking” performances right on time, the thinking of “the end of all bear news is the beginning of bull news” leaded the market in this stage. From another side to say, the market took IPO’s slowing down and authorized registration system’s postpone as a bull news for small- and mid- cap growth stocks, which stimulate the market’s risk preference. Tight liquidity and high-risk preference structured the environment that small- and mid- cap growth stocks leaded market to rise. Furthermore, the big-cap blue chips’ value recovery market tide stopped for a while, ROBAM and some other blue chips’ performances did not reach the expectations and had to take the worrisome from market. As the consequences of these series of factors, it is very obvious that capitals were distributing into growth stocks, small- and mid- cap growth stocks have frequently concentrated been analyzed and researched by private funds and other organizations.

2. 2018 stock market forecasting, structural market might continue;

Foresee the second quarter, the National People's Congress and the Chinese Political Consultative Conference(NPC&CPPCC) have already sent out the signals to the market about maintaining stability, in this case, the possibility of a big systematic risk to happen is still low. We also believed that A-share market has already entered a stage of slowly grinding higher, the market will just take some shocks from time to time, but investors won’t need to be too worried about short-term market fluctuate on A-share market. The opportunities for investing in single stocks are mainly focused on structural opportunities, and picking stocks getting harder. The following areas are suggested to look more often. As NPC&CPPCC mentioned, ecological civilization construction will be added into constitution, and which made environment protection industry likely to be a continuous hot spot; the Reformation of personal income taxation is hopefully to stimulate residents’ consuming potential, which created some extra opportunities in consumption sector; as for the investment on education and medical treatments sectors, which will also benefits insurance industry; besides, recent few years, people are always bullish on strategic new emerged industries, so tech stocks is one of the hot spots as well. From NPC&CPPCC, the negative side news is mainly focusing on keeping strict adjustments and control on real-estate industry, tighten up the supervision on finance industry and slowing down the investments on railway industry, etc. We believed there will not have too much trend opportunities in these industries and their relative sectors.

Sum up all above, we suggest:

For stock strategy and private funds allocation, we recommend investors to switch the distribute strategy like “core + satellites” into balanced-allocation distribute strategy to spread our attentions on both growth and value stocks, because, for now, we still can’t be sure that if the market has already switched its style or not. Meanwhile, we believed that investment in private funds have arrived a new developing stage of “sorting-out”, because the compitition of research and investment ability between all private funds is going to become much more intense than it used to be. For those blue-chip preferred private funds to say, since the blue-chips’ estimated value fixing stage has passed, from now on, the price raising spaces are all depending on their growth ability, and for the rising spaces that brought by these so-called growths required strong stock-selecting skills. If some investors take buying value-focusing private funds as an investing style, for this year, they will have to do more research and find out the “real” value investing private funds. For growth stocks-preferred private funds is the same, even though many companies have fell below their estimated value in mid and small cap growth sector, looking at the bigger picture, the valuing of entire Growth Enterprise Market is still at a relative high level and their performances are under pressure. We forecasted that, after a systematic market shocking, growth sector will step into a structural market stage, in which, leading companies are going to take advantages, so growth stocks investments should be limited into few selected stocks focusing as well. By the way, since Chinese government is allocating resources into technology innovation, we suggested that some high-tech specialized privates funds might need to pay some extra attention to growth stocks in high-tech sector.


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