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The Carrick Espresso is your essential five-minute investment briefing, equipping you with everything you need to know for the week ahead. Marlborough's Multi-Asset Solutions Investment Team summarise market events over the past seven days and preview the key events in the week ahead, while also sharing their expert insights.
Monday Espresso Podcast - Tea Time Special
[00:00:00] Sheldon MacDonald: This is a special edition of our usual podcast. Let's call it in honour of what we're going to cover today, which is China. Let's call it the tea time podcast. So focus on China. Now, this is a subject that has been perennially of interest. We keep looking at it, keep thinking about it. The question is, is now the time to be investing in China?
[00:00:20] Sheldon MacDonald: I'm joined today by Nathan, who we all know, and also by Ben Jones, who's our analyst that focuses on Asia. Ben, can you just summarise our current thinking and our current positioning in China?
[00:00:32] Ben Jones: Yes. So we're neutral in Asia and on China as well. So China makes up about 30 percent of the benchmark in Asia and they faced a lot of headwinds recently. So they had the property crisis. They've had weak exports because of nearshoring and consumer confidence is low, partly because of the zero COVID policy they've had and we've seen this in the deflation numbers there.
[00:00:53] Ben Jones: So they've tried to support the economy with some stimulus measures but this hasn't been enough to reassure investors so far, especially Western investors. However, the equity market is looking cheap and a lot of bad news is priced in. So there is the potential for a rebound if additional measures are put in place.
[00:01:10] Sheldon MacDonald: So there has been another policy announcement, another stimulus measure put forth but is this the turning point, Nathan? Is this enough of a catalyst to get us more interested?
[00:01:20] Nathan Sweeney: Yeah, so you've seen that Premier Li Qiang has announced some measures to try and support the equity market. So they're looking to intervene in a more forceful way within equity markets, because we have seen a sustained slide in equities and, that's due in part to, as Ben mentioned, issues within the economy, particularly within the property market as well.
[00:01:41] Nathan Sweeney: So there's a lack of confidence from investors and also consumers within China but as Ben mentioned, we are starting to see this brick by brick stimulus coming through, and this is just another example of that.
[00:01:55] Nathan Sweeney: Now, the key question is, will that be enough to reassure investors and attract investors back into the market? So this current package equates to about $285 billion in US dollars and ultimately, what we're seeing is a couple of equity managers, global equity managers specifically are starting to dip their toe back in.
[00:02:18] Nathan Sweeney: So from our perspective, we have been neutrally positioned, but we've been probing with that question over the last couple of months. Is it time to go overweight?
[00:02:27] Nathan Sweeney: And one of the key reasons we keep asking that is because Chinese equities are very cheap when you look at valuations compared to other regions. And then secondly, that stimulus as it continues to mount, we'll start to take effect at some point. So for us, we're really looking for that catalyst to decide actually, should we be taking advantage of this opportunity? Because as we all know, it makes sense to buy assets when they're cheap. Not when they're expensive and Chinese equities are screamingly cheap at the moment.
[00:02:58] Sheldon MacDonald: Sure, so after three, four years of negative performance, definitely some value on offer there, but let me press you on the question I asked. Is this policy announcement?
[00:03:07] Sheldon MacDonald: Is this the catalyst, do you think?
[00:03:09] Nathan Sweeney: Yeah, so a lot of commentators don't believe it's enough and we don't think it's enough either at this point, but hopefully this is the beginning of a number of measures to support the equity market.
[00:03:21] Nathan Sweeney: But what we're seeing is that the number of measures that has been passed have been increasing over the last couple of months, so you can see that there's more of a willingness to try and support the market. But from our perspective, we'd like to see a little bit more coming through.
[00:03:34] Sheldon MacDonald: Let me just jump in for a second, so listeners may not be aware, but Marlborough also runs a number of single strategy funds, and one of those is an Asian equities fund. The managers of that sadly couldn't join us today, but reflecting their views, they're also of the view that this isn't the catalyst.
[00:03:52] Sheldon MacDonald: They're underweight, so despite the value on offer, they've not been tempted to go in. They cite, much as you have, the difficulties on the economic front. Their view is that the policy measures that have been announced have all been too little, that they haven't been big enough, that a shock and awe approach is needed.
[00:04:12] Sheldon MacDonald: That every time something gets announced, it's drip fed into the markets and it simply gets absorbed by the markets without creating that catalyst. So they remain underweight at the moment. What do you think it might take to get us there? Is it just a matter of managers around the world recognising the value?
[00:04:28] Sheldon MacDonald: You spoke about seeing some other managers, investors around the world starting to nibble.
[00:04:33] Nathan Sweeney: Yeah, so if we think at a government level, so President Xi is obviously looking to rebalance the economy and create wealth and prosperity for all, and ultimately that's been bad for the property market and the equity market because you haven't seen that whole scale intervention.
[00:04:50] Nathan Sweeney: Now, if you were to see a change in tact at a government level, looking to support the markets to a greater degree, then I think that would provide the reassurance that's needed. It's also important to remember that we are approaching Chinese New Year and you tend to get lots of measures announced around that time too.
[00:05:09] Nathan Sweeney: So we do think that we're closer to the end of the poor performance that we've seen within China and as we can all see, you know, it is darkest before dawn, generally, and a lot of people are very pessimistic on the region, which makes me and the team ultimately want to look at this with a finer tooth comb.
[00:05:28] Sheldon MacDonald: We've not touched on perhaps what might be the elephant in the room, which is the geopolitical risk. Clearly, in geopolitical terms, there's a lot going on at the moment. In our podcast in recent months and weeks, we've been speaking about Taiwan, the risk there vis-a-vis China, there's the China vis a vis Russia situation going on.
[00:05:46] Sheldon MacDonald: Is that perhaps the all-encompassing risk that people are avoiding? Ben, let me bring you in. What are you hearing from our managers? Is this geopolitical issue a big concern?
[00:05:57] Ben Jones: So I think we're in a better place than we were maybe a year ago or two, but there is still quite a way to go. Biden and Xi had a meeting in November and they basically signaled that they want to improve relations and it was seen as a fairly constructive meeting.
[00:06:11] Ben Jones: But this year we have the US presidential elections and that will be really key for relations going forward.
[00:06:17] Sheldon MacDonald: Yeah, it seems like there's a recognition of the economic damage that some of these tit-for-tat measures are having and perhaps that's also going to help, as you say, lead to a further thawing of relationships.
[00:06:28] Sheldon MacDonald: Nathan, let's try to pull this all together, sum it up. So, so what is our position in short?
[00:06:33] Nathan Sweeney: Yeah. So ultimately today we're neutrally positioned because we don't really want to go underweight at this point because we think there is a potential opportunity for Chinese equities to reverse because firstly they're cheap and the government is starting to implement more measures.
[00:06:49] Nathan Sweeney: Now, the other thing to highlight is that normally when these things move, they can move quite quickly as well. So we're never going to be able to time it perfectly. So ultimately, from our perspective, we are looking for that opportunity to add, and that's looking increasingly likely as the news improves.
[00:07:06] Sheldon MacDonald: Great. Thank you very much, Nathan, Ben. Thank you all for listening, and we look forward to speaking to you again soon.