Who would dare defy the most powerful man on the planet?
The power of President Xi was without question, but his coronation as the leader for life was surprising. We knew after the 2017 Party Congress that he was without peer and the most powerful Chinese leader since Chairman Mao, but this step to move away from the safe guards of collective rule post the tragedies of the Cultural Revolution and the Great Leap Forward are a dramatic change for China.
Much has been written about this, so I will not elaborate on the long-term consequence, but I do want to bring up one key point. President Xi’s policy agenda will get implemented. The only question that we need to ask is; will it work? A major problem with Chinese policy has been the disconnect between national policy directives and the implementation of policy at the regional level. Local and regional governments often had different agendas to Beijing and therefore were hesitant to implement change. The conflict between the desire for growth and employment versus environmental concerns is one example as was the anti-corruption campaign as vested interest vied for the upper hand.
Not anymore. Who would dare defy the most powerful man on the planet? We know that key agenda items such as environmental protection will be prioritized, and this will change the way Chinese citizens and companies consume energy, drive, and produce goods. My criticism of President Xi is that his speeches are so broad and grandiose that it is next to impossible to know what he truly stands for and how these policies will be implemented. His speeches on trade, both at Davos in 2017 and at Boao in 2018 were full of fluff and hyperbole, providing us with no insight on implementation. Economic deleveraging is another example where we simply don’t know what the strategy is. There is a lot of talk, but the numbers imply that nothing is happening.
The point is that President Xi can do what he wants, but we don’t really know, outside of broad brush strokes, exactly what he wants to do or, more importantly, whether it will work. He has very few peers to challenge his views and the economic policy of Mr. Xi has yet to be truly tested. Just because he can implement policy doesn’t make them the right policies and while I believe that the outlook for China and the rest of the emerging world is incredibly constructive, investor expectations are very high for the Supreme leader.
The Global Thematic Portfolio currently holds core positions in Chinese internet companies, blue-chip financials and healthcare plays. This year, the narrative is not about robust economic growth, but rather a steady pace of deleveraging that lowers the level of financial risk and allows for a lower risk premium for Chinese assets. The VFTP China basket displays both growth and value characteristics. The internet companies are a leveraged play on consumer spending and the digitalization of China. The financials are a re-rating story as enhanced regulation, gradual deleveraging and higher rates boost earnings and help repair balance sheets and the healthcare companies will benefit from an aging population and changing regulations. The strategy’s constituents were mixed in March with the internet names down sharply, the banks flat and the healthcare names positive.
Chinese equities are getting really, really, attractive
A client pointed out to me in early April that since March 20th, when President Trump first announced the tariffs, A-Shares have underperformed the SPX by 8%. Outside of ZTE, Huawei, and the major steel companies at the margin, I challenge you to name another large public Chinese company that will be adversely affected by Chinese tariff.
The sell-down is unwarranted, and I get the feeling that Beijing may put a line in the sand at 3000 on the Shanghai composite. Chinese stocks, especially tech, banks and consumer names are making outsized profits and are cheap by any metric. The same client made the observation that earnings are higher today than when the index was at 6000 in 2007 and when the index was at 5200 in 2015. Admittedly, on both occasions, the market had gotten ahead of itself, but you get the point. I will be adding 15% to Chinese equities via the Shanghai composite, at 3025.
Founder, View from the Peak
IND-X Advisors Limited