One of the key assumptions you guys are making here, reading straight from your
report, the weakening trend in the US dollar, which has been ongoing for some
time, has been accompanied by a definitive turn in really interest
rates. How confident are you in that
assumption? Well, pretty confident it began really
the end of September and the trade weighted dollar is down over 10 percent
since then. And that's associated with this changing
pattern of global growth expectations. As you've been talking about on your
show, expectations for us growth have been falling away as the US isn't a very
different phase of the monetary cycle from here in Asia, where expectations
for growth in China are moving up really quite aggressively.
So we've just raised our China GDP growth forecast for next year to 5.5
percent. If we're right, the Chinese economy next
year will be growing 10 times as fast as the US economy.
And that's a completely different environment from what we have, as it
were, in the rearview mirror. I mean, there's a clear divorce between
what's being reported in terms of this current virus reappears in China with
actually which some of the evidence we're getting on the ground now.
If we do see a massive, massive surge continuing like this, I mean, how does
that change the way you're looking at reopening, if you will?
And could we see a reversal of policy? And that would, of course, be arguably a
very, very big headwind. Yeah.
That's a great question. So essentially what we know about the
Omnicom variant is that it moves through populations extremely quickly and that's
what's happening in China right now. And that underpins our view that once
you get through Chinese New Year at the end of January and you had through
February and March, you'll see a very significant recovery in economic
activity from exceptionally depressed levels.
Right now, November, December, and what we think is going on right now is a
really conclusion of a two year major slowdown in China, which is, of course,
why Chinese equities and Hong Kong equities have struggled so much in the
last two years. But that process has ended up with
valuations on some of the lowest that we've ever seen in the entire history of
Hang Seng and MSCI China. And that's why we went more constructive
a few weeks ago. And given what your colleague Mike
Wilson has been saying about the US market, how would you then look at
earnings coming out of China and how the stock is evolving?
Well, if you look at MSCI China, it has almost zero sensitivity to US macro.
So ninety five percent of earnings are derived at home for the index
constituents in China equities. And so essentially it all hinges on that
relative GDP growth story. And what I would also say, take an index
like the Hang Seng, something very unusual is now happening.
The Hang Seng index is showing a negative beta to the S&P 500.
That is these moves that we're getting in the S&P 500 are no longer really
affecting Hang Seng. It's all about the China reopening the
end of Covid 0 in China and this this very significant monetary and fiscal
stimulus that's also in place in China. And you are looking a bit of rotation
right just now, taking some money off the table, a shares and possibly
rotating. Now full on Hong Kong now it seems right
now. Yes.
So my colleague Laura Wang and I for several years now have preferred the
Asia market to offshore China. But if you look at relative valuations
and in particular these Shery Ahn PCAOB inspection, which seems to be heading in
the right direction, we now have catalysts for foreigners to re-engage.
And of course, the offshore China has a far bigger representation in consumer
and consumer services. And that's where we expect this V shaped
recovery to be most evident. How would you describe institutional
positioning right now in Chinese assets? Jonathan?
Well, if you look at the long only community overall, the data that we have
suggests that compared to the peak, which was at the end of 2020 and early
2021, those positions are down by about two thirds from the peak.
Now, partly, of course, that's because the benchmark index weighting has
declined, but people have also been steady and persistent.
Sellers hedge fund positioning six or eight weeks ago was pretty well flat.
And now certainly it is the case. Obviously, the market's up a lot that
there's been some re-engagement from those kinds of accounts already.