Domestic demand recovery coupled with "anti-involution" focusing on two major investment opportunities

For investment opportunities in the Year of the Horse, Chen Jinwei, Deputy Director of the Equity Investment Department II at Penghua Fund and fund manager, considers two main directions to be the most promising: the midstream cyclical industries and consumer and pharmaceutical sectors with domestic demand attributes.

Chen Jinwei remains optimistic about the midstream cyclical industries benefiting from the “anti-involution” trend. Taking the chemical industry as an example, he believes there is a significant expectation gap in this sector.

First, chemicals possess resource-like attributes, which may differ from traditional market perceptions. Chen Jinwei analyzes that if we break down global chemical industry capital expenditures over the past five years, almost no new capital expenditure outside China has occurred. If China can effectively control incremental capacity through the “anti-involution” approach, then chemicals will have resource-like qualities.

Second, regarding the interpretation of “anti-involution,” Chen Jinwei believes it is better understood from the demand-side policy perspective. Some investors, when analyzing “anti-involution,” see supply and demand as completely separate issues. They are accustomed to defining “anti-involution” as a supply-side policy and emphasize the need for demand-side policies to see results. However, this is not always the case. For example, when studying micro-level issues, each industry discusses stories of demand de-urbanization, with the proportion of real estate infrastructure decreasing in demand, while export manufacturing’s share increases. But when analyzing macro issues, there is an expectation for strong domestic demand stimulation policies. Recognizing that many industries are increasingly driven by external demand and that in some sectors, pricing power is approaching monopoly status, reduces the obsession with demand stimulation. In the past, efforts have been made to gain pricing power in many industries. “Anti-involution” is about realizing this pricing power and transferring overseas consumer dividends to shareholder returns, employee wages, and supplier profits through the “anti-involution” approach. This is the most direct and sustained demand-stimulating policy.

The second sector Chen Jinwei favors is consumer and pharmaceutical industries with strong domestic demand attributes. These sectors have performed poorly over the past five years but may have significant space and expectation gaps in the next five years. Domestic demand-driven consumption and healthcare can also be seen as representatives of consumption.

He believes the recovery path for domestic demand is already quite clear, with an inflection point just around the corner.

First, consumption does not equal the spending of 1.4 billion people, as individual differences are huge. Some investors emphasize that income expectations have not improved and housing prices continue to fall, leading to a long-term bearish view on consumption. However, Chen Jinwei holds a different opinion. He believes that the recovery of consumption requires improved income expectations, which is undeniable. But he emphasizes that changes in income are not synchronized across all 1.4 billion people and should not be generalized based on personal experience. The most severely affected groups during the recent consumption downturn are precisely those who benefited most from the previous consumption boom. Their expectations are gradually bottoming out, while other groups have maintained relatively stable expectations with some structural highlights. In the future, with the corporate profit recovery driven by the “anti-involution” trend, overall societal income will reach an inflection point.

Second, Chen Jinwei believes that opportunities in consumption may come from a new wave of companies, especially in mass-market goods. He favors consumption driven by income redistribution, thus preferring mass-market consumption.

(Edited by: Xu Nannan)

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