WE THINK：Vision 2025 - Waiting patiently

2024 Review：

Macroeconomic Policy Shift, Extreme Sorrow Turns to Joy in the Stock Market.

In 2024, China's equity assets performed reasonably well from a systemic perspective. Despite initial investor pessimism and a downturn in small-cap stocks at the beginning of the year, along with significant market pressure in the first half of Q2 and Q3, a clear shift in macro policy on September 24 led to a rapid market recovery. Although October saw a high opening followed by a decline, and November and December were marked by consolidation, both A-shares and Hong Kong stocks ended the year with positive returns. The annual gains for major indices like the Wind All China A Sustainability (ESG) Index, CSI 300, Hang Seng Index, and Hang Seng Tech Index were 10%, 14.68%, 17.67%, and 18.7%, respectively, significantly exceeding most people's expectations at the start of 2024.

Looking back at our outlook theme at the beginning of 2024, "This time is different or will the extreme lead to a turnaround?" it seems that this cycle still follows familiar patterns. As downward pressure from economic data mounted, we finally witnessed a significant shift in macro policy in the latter part of Q3 2024. In this era of instant information, most investors were caught off guard, as the capital market surged by 40.72% over six trading days. （Wind All China A Sustainability Index rose from 3,921 points on September 23 to 5,518 points on October 8, an increase of 1,597 points, reflecting a remarkable gain of 40.72%.）A bear market is not driven by policy, nor is a bull market purely a result of it. Following the initial surge, the pace of anticipated policy implementations slowed, leading to a consolidation phase in the stock market. Many investors shifted from a panic-driven mindset of fear of missing out on a market rally to a state of hesitation and observation.

How should we look at the opportunities and risks of China's economy and capital market in 2025? Standing at the starting point of the new year, let's discuss together.

2025 Outlook:

Patiently Awaiting Policy Implementation and Acceleration.

The Central Economic Work Conference has clarified the policy goals for 2025—stay calm!

Held in Beijing from December 11 to 12, 2024, the conference reviewed the economic work of 2024, analyzed the current economic situation, and outlined the economic work for 2025. It set the tone for 2025's policies, shifting fiscal policy to "more proactive" and monetary policy to "moderately accommodative." This marks a return to more active macro policies in China after over a decade since the 2008 financial crisis. The conference emphasized the need for proactive macro policies to expand domestic demand, stabilize the real estate and stock markets, mitigate risks in key areas and external shocks, stabilize expectations, and stimulate vitality.

The first of the nine key tasks for 2025 is to comprehensively expand domestic demand in response to the current insufficient overall demand in China's economy. The policy goals for the real estate and stock markets are also very clear and specific. Expectations for asset prices to recover, along with improving the balance sheets of households and businesses, are crucial for boosting market confidence. Since the policy statements on September 24 and the confirmation at the Central Economic Work Conference, a strong signal has been repeatedly conveyed to society: "Macroeconomic policy has completely shifted!" Next, we need to wait and observe the implementation of specific policies and whether the economic data can effectively improve after their enactment. If the improvement is not significant, there may be a need to intensify policy measures. We anticipate this will be a gradual process of experimentation and escalation. Investors may require some patience and composure; if economic data does not show rapid and comprehensive improvement, it may not necessarily be a bad thing, indicating that the policy measures are insufficient and need to be strengthened further.

For the economy to stabilize, the stock market must first maintain stability and trend upward. The opportunities in China's capital market in 2025 may surpass the current expectations of most people!

Examining the relationship among macroeconomic policies, capital markets, and overall economic performance in major global economies reveals a clear pattern. When a country's capital market is in a downward trend, it is nearly impossible for the macroeconomic data to stabilize and recover. Generally, a shift in macroeconomic policies (primarily monetary and fiscal policies) tends to precede changes in the capital market, while stabilization and recovery in the capital market often lead the improvement in macroeconomic data. We have often likened the relationship among policies, the stock market, and the economy to that of a train's engine, body, and rear. Currently, in China, this relationship is characterized by a clear shift in policy and a stabilization at the bottom of the stock market. If the next phase of policy measures is strong enough, there is a high probability that the stock market will show sustained improvement. As the prices of this important asset recover, it will contribute marginally to the improvement of daily consumer demand, real estate consumption demand, and overall domestic demand.

For investors in the Chinese capital market, this phase may be historically rare, as the highest decision-making authorities have made the stability and moderate rise of the stock market an important policy goal. To put it simply, the government is keen for everyone to make money through the stock market, thereby generating income from assets to stimulate consumption and boost the economy. However, having just come out of a bear market, most investors have yet to shake off the shadow and memories of that downturn, making them hesitant to believe in a recovery. This might be one of the fundamental rules of the capital market, explaining why only a few investors can profit from stock market investments. Many people need to see results before they believe; true winners are those who understand these rules, trust the underlying principles behind the phenomena, and consistently act in accordance with them.

Is it more like Japan's stock market in 1992 or in 2012?

Why did Japan's stock market enter a long bull market lasting 12 years after 2012? What factors changed behind this? Before 2012, Japan's economy and stock market were trapped in a 20-year deflationary period without a real recovery. However, post-2012, the stock market began a sustained upward trend. As the stock market rose, the real estate market also stabilized and rebounded, and the macroeconomy gradually emerged from deflation, moving towards healthy growth. The biggest change came after Shinzo Abe returned as Prime Minister in 2012, drawing lessons from Bernanke's successful handling of the subprime crisis triggered by the U.S. housing bubble. This approach was based on Gu Zhaoming's theories about "balance sheet deflation." Abe introduced three key policies: first, a more accommodative monetary policy; second, a more aggressive fiscal policy; and third, structural reforms. The central bank began directly intervening by continuously purchasing Nikkei 225 index funds each year. Initially, the market was skeptical, but as the trend developed, more and more people began to believe in it.

The policies in Japan after 2012 differed significantly from those in 1992 in several key ways. First, stock market asset prices became important targets and tools for regulation. Second, unlike the indecisiveness of the 1990s, where slight improvements in economic data led to hesitation and tightening of policies, the post-2012 policies demonstrated stronger determination and consistency. The Bank of Japan's purchases of ETFs were also more sustained and patient. In 2024, Central Huijin Investment Ltd. increased its efforts to buy various broad-based ETFs, reaching a total ETF market value of over 940 billion RMB by the end of the year. This figure does not account for holdings from various state-owned financial institutions and social security pension funds. Considering the deployment of work plans for 2025 discussed in the Central Economic Work Conference and the implementation of more robust macroeconomic policies, it is clearly unnecessary to be overly pessimistic about the current Chinese stock market.

Some speculations about China's capital market in 2025

Systemic stability may lean towards the positive.

Given that a comprehensive improvement in the macro economy will take time, and with certain downward pressures on major overseas economies like Europe and the U.S., along with uncertainties regarding potential tariff policy changes from the new U.S. government affecting the global economy, expectations for the A-share market to independently enter a bull market should be tempered. However, with a very positive macro policy tone and central enterprises like Huijin actively increasing their ETF holdings, we lean towards the view that systemic risks in the A-share market are low, and there are conditions for an upward shift in overall valuations.

Seizing structural opportunities is increasingly important—embrace the new economy!

Capturing structural opportunities may be a more crucial topic in 2025. While some traditional growth industries have faced challenges in profitability due to factors like real estate, employment, population issues, and increased competition, their growth characteristics are becoming more cyclical. However, new growth industries and sectors are emerging, particularly with the maturity of AI technology, leading to the birth of new industries and tracks. These sectors are similar to the recent years' developments in new energy vehicles and photovoltaics, where technological advancements and gradual maturity have prompted large-scale commercialization, giving rise to new economic fields. From the latest developments both overseas and domestically, the growth rate of new economic sectors is very rapid. Therefore, in 2025, structural opportunities may lie not only in high-dividend companies that have already undergone some recovery but are still undervalued, but also particularly in the field of new economic growth stocks, which may warrant special attention.

The market is never short of opportunities to make money; what it lacks is the ability to seize those opportunities! For most investors, the chances in these new economic sectors likely fall outside their past skill sets. This is because these industries either did not exist before or did not have opportunities for transformation through new technologies. These industries either did not exist before or lacked opportunities for transformation through new technologies. However, by 2025, technological advancements will give rise to these sectors. Therefore, a strong asset management firm's research team must maintain an open mindset, continuously learn, and embrace new knowledge and changes in order to thrive in the ever-evolving capital market.

2025 may be a year of diverse developments, but the new economy is likely to be one of the most dazzling among them.

On this occasion of the New Year,

I wish all my friends a successful investment journey in 2025 and may all your wishes come true!

Wu Weizhi

5-January-2025

本期《偉志思考》簡體中文版鏈接：

伟志思考：2025年展望--静待花开