It is lonely believing the world won’t end
The chorus from those who have complete contempt for my views has grown louder in recent weeks. There is a certain type of investor, generally rates and currency types, who believe in the intellectual superiority of a negative view and when they are correct, for the right or wrong reasons, any positive stance is completely dismissed with utter disdain. My framework for believing that financial assets are overstating the negative impacts of trade disputes from a growth and profit perspective is viewed by bears as naïve. Yet, despite a terrible month for the emerging market assets (especially China) that I have espoused, I remain convinced that the outlook for economic activity and the potential for a three-pronged Chinese stimulus will eventually restore belief that, despite the determination of the American President to upend the global order, fundamentals will eventually rule the day.
As we stand today, global growth remains in decent shape. US activity remains on a sugar high, induced by tax cuts. European growth, despite a soft patch, is showing some signs of stabilization. China has softened at the margin, but not dramatically and concerns over financial deleveraging appear overblown. Global profits are reflecting this. An array of conversations with clients, our think tank network, and the economists I respect are all telling me the same story and that is that the economic impact of a trade war won’t be that severe and it is the hit to sentiment that we cannot quantify. Fair enough, but doesn’t that imply that eventually, if the economic impacts of a trade war are muted, markets eventually align asset prices with the new growth paradigm, where ever that may be?
Comparisons between China’s current equity sell off and that of the bursting of the 2015 equity bubble are themselves, naïve. You can’t compare the profits outlook and inexpensive nature of today’s valuations and eventually, domestic investors who have been concerned with President Trump’s trade rhetoric, will return. The catalyst for me continues to be the growing likelihood of a targeted monetary and fiscal stimulus package involving support for SMEs. A third leg, a weakening of the trade weighted RMB, is also likely. Allow me to be clear. RMB weakness against the USD is not necessarily bad for Chinese stocks, especially when accompanied by trade weighted RMB weakness. In the nine months post the Shanghai Accord where the world agreed to weaken both the USD and RMB, the Shanghai Composite almost 20% as the CNY fell 6% versus the basket. An orderly trade weighted weakening of the RMB is positive for Chinese assets. On Monday, the Thematic Portfolio will sell the CNY v the CFETS Basket.
I remain convinced that the dramatic underperformance of Chinese equities will end soon, as hopes of stimulus become a reality. I am not saying that we get the reckless fiscal spending of 2009. It will be targeted, but also enough to turn sentiment. We have no control over the rhetoric of President Trump, so US stocks are a sell into strength, but long China versus short US equities (ex NASDAQ) should be a compelling scenario for the balance of the year.
A positive, low volume week expected because of the fourth of July. The RBA will meet Tuesday. Monday sees the release of a wave of global PMIs with Europe being really important as it could confirm a rebound. If so, we will take a small 5% spec position in European Banks.
On Tuesday, South Korean CPI, Hong Kong retail sales, and US Durable Goods Orders. On Wednesday Australian Retail Sales. On Thursday, German Factory Orders, and the Fed publishes the June meeting Minutes. On Friday, German Industrial Production, and the monthly lottery that is US employment.