Where are you on China? We've just come through the National
Congress in general.
We've had a very strong U.S. preeminence view recommending clients
have a significant overweight to U.S. equities and in turn a significant
underweight to emerging markets, which includes China.
If you actually go back and look at the returns from the trough of the global
financial crisis to the present, you will see that U.S.
equities are up about 16 percent on an annualized basis and 5 percent in China
on an annualized basis. But actually, one needs to look at the
impact of that compounding as this chart that you just put up.
If you had had one hundred dollars and put it in U.S.
equities today, you'd have 750 dollars if you would put it in China.
Hundred and eighty eight dollars, not even a quarter of those returns.
Now, that has prompted some people to say what that actually means.
China is very attractive. We actually think that China is not
attractive. China's growth will be much slower than
people expect going forward. China has overinvested in property and
infrastructure. They have a major demographic problem.
So when we actually look at it on a forward basis, we think the earnings
will not be there to even support these valuations.
Oh, I just have to jump in that day. There's so much truth in that about
China. It's just so interesting to see, though,
that much of the big sell off started in just 20 21 last year.
China is currently 30 percent roughly of the emerging market benchmark.
So it's really important and it has both buoyed up the benchmark and dragged it
down. But there's China and Taiwan together,
some 45 percent of the index. You sort of can't get away from China if
you want to invest in emerging markets. And one way or another, their growth
rates have tended. They tend to be faster than the U.S.
in the past. And sure, Porsche, to your point,
Sharmeen, they are slowing. But the opportunities there, because
it's just such an enormous market are really hard to pass up.
I think the property sector is horrible. And what place had the worst property
wipeout we can think of in the late 80s? It was Japan and yet there was still
money to be made in that. What ended up being rather stagnating
situation if stock selection was good. So we're never writing off China.
But what's irresistible about emerging markets, again, with China as the anchor
tenant is that it's trading at just a 20 year low and price to book value.
And then on a price to earnings basis, it's also at this extraordinary bouncing
or long it's 20 year low versus the U.S. market and the world index.
So at some point in time, you have to say the price is right for emerging
markets led by China. There's no doubt about that, Sarah.
But when we actually look at the price we think you need to think about, the
sector awaits. So emerging markets in general, and that
applies to China as well, have a very different mix in terms of the sector
exposure relative to the U.S.. So on the surface, when you're looking
at the discount from China or emerging markets or even developed markets
relative to the U.S., it looks like it's very low.
But on the other hand, if you adjust for the sector weights, meaning, for
example, technology is 25 percent of the S&P 500 and less in China, less in
emerging markets, and maybe even less than half in developed markets.
If you adjust the sectoral weights in these countries and regions are not as
cheap as it appears. In fact, suddenly emerging markets,
instead of being, for example, let's say a multiple of 16 for the U.S.
versus 10 for emerging markets. Once you adjust the weights, it's more
like 14 and a half times forward earnings.
So, in fact, if you adjust the sector, wait, then we don't think these markets
look at as cheap. And historically, that discount has not
always been an indicator of good forward returns.
But, sir, you mentioned a very important point, which is stock selection.
It doesn't mean that stock selection can't add value, but when we look at the
countries in aggregate and broadly at sectors, we just don't find them
attractive at all. That's a very good point about sectors.
And and I'd argue this think about in terms of value versus growth.
The growth part of the emerging market benchmark doesn't still look pricey.
But if you strip out the stocks that are in that lower valuation group, they have
just they're at lows that we haven't seen in a long time.
They're very, very compelling. And they you can find those across
sectors, which is pretty useful, but only for China.
The catalyst will make China much more interesting.
It's just a recovery. And if it turns out the head of our
China office in Shanghai tells us next March is likely the date at which the
the gradual reopening becomes less gradual to the point, it's so obvious
that they can't be denied by the party leaders
that will create an economic tailwind for China, even with a very tough
property market. And it could, interestingly, coincide
with what is still slowing in the rest of the world, making China look
relatively attractive. Sara, I suspect we're all looking for
bargains and trying to avoid falling knives.
All right. Whether it's China or somewhere else.
Talk about Europe. Are there bargains in Europe at this
point or is that a falling knife fill?
And with the Russia invasion of Ukraine in February, Europe was just awful and
it continued to be awful. And the cyclical part of Europe.
Any type of manufacturing, any users of natural gas were sold off heavily by
markets, materials within that chemicals.
So many stocks trading at discounts to book value that indicated apocalypse.
So, yes, bargains in Europe and they're still there.
Some of those stocks have improved. But to the degree there isn't a harsh
winter and Europe doesn't consume all of its energy, it's gas storage reserves,
which we think it won't. It looks as if Europe can squeak through
this winter. And perhaps even next.
Meanwhile, there's a feverish effort there to build LNG terminals and ensure
that there's a re gasification capability.
This all takes time. But Europe is united around their
concern of having been dependent on Russian energy, in particular natural
gas and their determination, fierce determination to be independent from
that. And that itself is turning out to be
useful because we need to see, especially within the eurozone, some
type of fiscal unity. And they're getting closer to that.
So it's not your business to a great place to be as
a tourist. But it certainly looks from investor
perspective, attractive women as his as a chief investment officer.
How do you discount geopolitical risk? Because obviously, the war in Ukraine is
awful. Looks like it's going to live forever,
but it may not. How do you discount the possibility if
something happened, it went away tomorrow, it would change the valuation
dramatically. Do you take a look out at all?
We pay a lot of attention to geopolitical risks to try and figure out
what has or hasn't been discounted. And obviously, it's very hard to know at
any point in time what the market has discounted.
But both in terms of China and in terms of Russia, we think the geopolitical
risks are significant and we cannot anticipate them.
So do we know if there's further escalation?
Would Russia use some kind of a dirty bomb?
What else will they do? Will they attack infrastructure or will
they increase cyber attacks? So definitely something to worry about.