Probability-based investment modelling for professional and institutional investors
Across a broad spread of asset classes and strategies, investors have responded to recent dollar strength by putting on a series of trades which suggest they expect it to continue. This doesn’t prove that it will, but the market reaction has been consistent and immediate.
According to our metrics, the US Tech sector entered bubble territory two weeks ago. The only times it has had a higher score were in 1999 and 2000. But Tech bubbles can deflate gently, as was the case after September 2014. We are actually more concerned about the frenetic switch out of US Value into US Growth, and the runaway performance of the Chinese Tech sector over the last five years.
Newspapers like to argue that events are unforecastable, which is why you need to pay for access to news. We agree that forecasts don’t really work, but we don’t think news does either. We think that prices move before news. Very often the change in price is the news.
We don’t have the killer chart that says China is going to blow up or shoot the lights out. Our models are curiously inconclusive, which is unusual for China, and the underlying data are trading in a very narrow range. All of which makes us nervous.
China is on our negative watch list compared with the rest of the global equity universe. Countries which have occupied its current chart position normally drop into the bottom quartile. Part of the problem is the faltering performance of the local Tech sector, the largest in the index. A decline in Chinese equities would quickly complicate relationships with the new US administration and make global investors very nervous.
Now that the US elections are over, markets will begin to refocus on the big issues facing the global economy, one of which is the CNY USD exchange rate. We think that the behaviour of the Chinese Industrials sector may offer valuable insight into what Chinese investors think about this.