All posts in category: China (42)

New EM Equity Model

Friday, March 15th, 2024

More visibility and better risk-adjusted returns

Our new EM equity model replaces the global country model and is designed to give us greater visibility on this asset class. We show that our normal process outperforms the benchmark in absolute and risk-adjusted terms. The average annual outperformance since inception is 2.9% and this is achieved despite the model’s volatility being lower than the index. It has outperformed the index in 20 out of 28 years and has good persistence of recommendation. The average stay in the top and bottom five (out of 25 countries) is about 18 weeks. India is the top-ranking country at the moment and close to maximum overweight, while China is at the bottom and close to maximum underweight.

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China on the Brink

Friday, August 18th, 2023

Who is exposed in Europe and the US

We don’t know if there will be Lehman moment in China, but we are fairly confident that there is a major discontinuity coming soon: either a collapse of consumer and financial confidence or a series of stimulus measures, which will kick the can further down the road – a bit like the Eurozone crisis of 2011-12. We can’t forecast the outcome, but we can work out which companies and sectors in the US and Europe have the greatest revenue exposure. In general, more European companies have a modest 5% exposure to China, but if we take the threshold of concern as 10% of sales, the US has more exposure than Europe. The big exposure is US Technology where 65% of market capitalisation has more than 10% of sales in China, Hong Kong or Taiwan.

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A Label Without Meaning

Friday, July 21st, 2023

EM Equities have too much complexity and not enough return

All EM equity indices comprise a mix of countries which once shared some important economic characteristics, but no longer do. The whole asset class is dominated by China, where the investment outlook is increasingly uncertain. Looking at over 20 different countries with vastly different growth profiles and levels of income no longer makes sense. Investors who wish to reduce the complexity of their portfolios should think about swapping their EM equity allocation for one to India on its own. It has outperformed its benchmark by a substantial margin over the last 5,10, and 20 years and will probably continue to do so given its superior demographic profile and productivity outlook.

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What To Do About China

Saturday, May 6th, 2023

It’s an ill wind which blows nobody any good.

EM Equities are in deep trouble and we see no early turning-point, mainly because China is also suffering. The strong outperformance promised after the end of lockdown has not materialised, but more importantly, our models suggest that the local equity market itself is not functioning as it should. Two relatively obscure indicators: active weight and persistence of winning and losing sectors are either at, or very close to, 20-year lows. This suggests that investors are struggling to construct portfolios, which deliver an appropriate balance between risk and return. This is not a problem China has suffered from until recently and if it continues, international investors may have to regard this as a secular trend, not a cyclical aberration. If EM and China are not attractive destinations for international capital, other regions must benefit on a relative basis – and the most obvious is Europe.

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Eight Non-Consensus Views

Monday, December 19th, 2022

A bearish consensus can still be complacent

We agree with the idea that US equities are going to suffer in the New Year, but disagree with many of the assumptions surrounding this view. We think US Treasuries are behaving like a risk-asset and cite their current elevated volatility as evidence. We highlight the positive correlation between equities and bonds, which means that there we may well repeat the bear market of everything we saw in H1 2022. On this basis, the dollar strengthens temporarily and the trough in equities is delayed till Q3. When the recovery comes, sectoral and geographic leadership in equities in likely to change and China will be a much bigger part of the story than Western investors currently imagine. The outlook for oil is anyone’s guess, but it will influence inflation expectations and generate bursts of volatility in all markets, contrary to its current benign behaviour.

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Time for Some Bottom-Fishing

Friday, November 26th, 2021

Chinese Technology could lead a rally in EM Equities

We spend a lot of our time dissuading clients from going bottom-fishing, mainly because it doesn’t work very well. But there are times when we may need to do it to protect ourselves from the risk of being underweight a sector or country which rallies very fast. This week we highlight a combination of charts (EM Equities and China vs the World and Chinese Technology vs China) which have all sent recent signals suggesting that we may need to close our underweight positions in a hurry. There is a risk/opportunity that Chinese Technology could lead sharp and unexpected rally in EM Equities.

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The Roundabout Accelerates

Friday, November 12th, 2021

Global equities are about to start rotating faster than usual

We expect global equities to start rotating faster than usual on a country/regional basis. We discuss the technical rationale in some detail, but the important message is that this not about the recent winners such as the US and India, or the losers like China and Korea, but all the others, which are somewhere in the middle. There are several European countries like Germany, the Netherlands and Sweden, which are at risk of dropping down the ranking, while selected EM countries in Asia and Latin America could benefit. If our analysis is correct, this should happen before Christmas.

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China vs US Exceptionalism

Friday, August 27th, 2021

Exposure to some sectors may be justified but timing is critical

Our recommended exposure to Chinese equities is effectively zero, but EM Equities (of which China is by far the largest part) are critical to the success of any global balanced portfolio. So, we have looked at individual Chinese sectors to see which ones have been the most successful diversifiers compared to their US counterpart. The good news is that it is easy to identify those which fail the test badly: Financials, Industrials, Telecom and Small Caps. The bad news is that only Technology has offered successful diversification over the whole of our test period, but now is not a good entry point. There may also be opportunities in Consumer Staples and Healthcare, but, again, we prefer to wait for a better entry point.

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Time to Separate China from EM

Friday, August 13th, 2021

EM ex China has begun an interesting rally

We think it is time to take China out of the main EM equity indices. Some of the arguments made for its inclusion are no longer valid. It doesn’t make sense to have separate benchmarks for companies listed in China and Hong Kong. Separate indices for China plus Hong Kong and the rest of Emerging Markets would increase flexibility for all investors, not just those who no longer wish to have passive exposure to the current regime in China. Once we make the split, we can see that EM ex China has already begun an interesting rally.

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The China Question

Friday, July 30th, 2021

China’s problem may be Europe’s opportunity.

Our recommended weight for Chinese equities has just hit its all-time low since the beginning of this century. They have been in extreme underweight territory for their longest period ever. We think this is more than a temporary misunderstanding. It could represent the breakdown of the pro-China consensus that has dominated US investment thinking for over a decade. There may be parallels with what happened when the US became disillusioned with Russia 10 years ago. US investors who want international equity diversification will be forced to have another look at Europe.

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