As the calendar turns to a new year, many prominent private equity firms in China, including Jinglin Asset Management, Renqiao Asset Management, and Juming Investment, have begun unveiling their investment strategies for 2025. The general consensus among these leading firms is a positive outlook for the Chinese stock market in the upcoming year.

At the forefront, Jinglin Asset Management, led by Gao Yuncheng, is redirecting its attention to the core fundamentals of value investing in equities: the free cash flow of companiesThis strategic pivot is based on a steadfast belief that free cash flow is not merely a metric; it is the guiding light for making prudent investment decisionsIn an environment rife with economic fluctuations, structural issues, geopolitical disruptions, and policy changes, focusing on the essence of a company's fundamental performance is paramount.

Rather than pursuing every avenue that might yield investment returns, Jinglin emphasizes the importance of identifying those segments of the market that exhibit robust, sustainable free cash flow

They view this metric as an essential criterion in their global investment screening processThe firm has meticulously curated a portfolio of companies that not only demonstrate stability in their operational paradigms but also possess high customer loyalty and a consistent free cash flow akin to a reliable waterway.

These selected companies are expected to generate a solid baseline return for investorsAdditionally, the portfolio includes a selection of industry leaders that are globally competitive, currently transitioning through stages of exploration and operationsAmong these firms, a certain number are anticipated to reach critical inflection points that will lead to significant cash flow surges each yearThis component of the portfolio is expected to be a source of excess returns.

Gao Yuncheng believes that after nearly three years of market turbulence, a pronounced divide is emerging among industry leaders and their competitors

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Some companies have weathered competitive pressures effectively, maintaining a robust operational foundationWhile their valuations have rebounded from historical lows, the price-to-free-cash-flow ratios suggest that they remain priced at a discountMoreover, certain sectors are witnessing an inflection point in capacity recovery, which could lead to a resurgence of demandShould inflation peak in 2025, firms engaged in consumer-centric businesses are poised to exceed current market expectations for revenue and profit, possibly becoming a primary source of excess returns.

Furthermore, although overall consumer data presents challenges, certain service sectors and companies that emphasize emotional value are emerging as the bright spots in the economic landscapeAccording to prevailing trends, China is likely entering a phase where growth in service-oriented consumption outpaces that of physical goods, a trend projected to extend for many years

Companies that offer engaging, experiential services are faced with significant growth opportunitiesIndustries like the smart electric vehicle supply chain and smart appliances are witnessing rapid advancements, placing Chinese firms in pivotal positions on the global stage as they continue to innovate.

Meanwhile, at Renqiao Asset Management, founder Xia Junjie recently released the firm's investment memo for 2024, shedding light on the trends he anticipates shaping the investment landscapeHe emphasized the importance of consumer recovery, highlighting five key trends for the upcoming year.

First, the focus on domestic consumption recovery is paramount, particularly within sectors such as pharmaceuticals, select food and beverage industries, aviation and tourism, home goods, and automotive servicesXia posits that, when analyzing the macroeconomic landscape, consumer spending should serve as the cornerstone of policies in 2025. Furthermore, while internet platform companies will also benefit from higher domestic demand, the landscape has become more nuanced after two years of stabilization in performance metrics and significant market corrections

Moving forward, attention should shift towards breakthroughs in new technologies and corporate social responsibilities, particularly in cyclical consumer goods and services with low penetration rates.

Second, Xia predicts continued outperformance of Hong Kong stocks over their mainland counterparts, with dividend-focused ETFs presenting attractive investment opportunitiesSince 2019, Hong Kong stocks have lagged, but a modest recovery is now underway as the market reflects factors like the U.SFederal Reserve's interest rate cuts, turning points in internet company operations, and increased shareholder returns from state-owned enterprisesThis resurgence suggests a potential turning point for Hong Kong stocks, which Xia believes will maintain their upward trajectory against A-shares into 2025. Companies capable and willing to deliver stable high returns to shareholders are likely to become increasingly scarce, with their dividend yields aligning more closely with those of long-term government bonds.

Third, Xia notes a shift in the bond market dynamics, transitioning from a prolonged bull market to a period of increased volatility

The bull run that began in 2018 has reached its sixth year, but every financial instrument experiences cyclical movements, and the bond market is no exceptionAlthough there is a belief in a long-term environment of low interest rates in China, Xia asserts that short-term rates are unlikely to dip to zero.

Fourth, the expansion of AI applications will continue, yet substantial divergences among AI-related stocks are expected, as speculative enthusiasm wanesXia suggests that while AI's application will deepen in 2025, the emergence of a speculative bubble is a low-probability scenarioHe cautions against basing investment strategies on unlikely assumptions, noting that advances in technology may not correlate directly with stock performance, drawing parallels to the broader relationship between economic trends and stock market movements.

Fifth, the trajectory of inflation is predicted to become one of the most significant divisive issues of 2025, holding substantial implications for investment strategies