Conclusion: To the woe of many short-sellers, the Year of the Chinese Bull is just getting started. Don’t mistake that for the Year of the [insert consensus’ top long idea] Bull. Risk will need to be acutely managed around expectations.
Position: Long Chinese Equities. Vehicle: CAF; high exposure to Financials and Consumer stocks – which are our favorite sectors within China.
“Expectation is the root of all heartache.”
As Keith pointed out in this morning’s Early Look, China’s June/2Q economic data was rock solid. The slopes of nearly every major data series came in positive on the margin, and those that didn’t slowed at a slower pace (a leading indicator for inflection points):
- Retail Sales growth accelerated in Jun: +17.7% YoY vs. a prior reading of +16.9%;
- Industrial Production growth faster in Jun: +15.1% YoY vs. a prior reading of +13.3%;
- Money Supply (M2) growth faster in Jun: +15.9% YoY vs. a prior reading of +15.1%;
- Loan Growth accelerated: +5.1% YoY vs. a prior reading of -13.7%;
- YTD Fixed Asset Investment growth slowed to +25.6% YoY vs. a prior reading of +25.8%; and
- Real GDP growth slowed to a healthy +9.5% YoY vs. a prior reading of +9.7%.
On a QoQ basis, Chinese GDP actually accelerated (albeit marginally) to +2.2% vs. the +2.1% pace recorded in 1Q11. Accepting the fact that the Chinese government makes up the number anyway (per China’s own Vice Premier Li Keqiang), we think it pays to be on the long side when they start to print data that looks increasingly better on the margin. Of course, we don’t think it will pay to be long any/all things levered to Chinese demand. As we can plainly see, consensus is back on its “global growth” horse today, using the solid Chinese economic data as a reason to be broadly bullish. We must remember that this is the same consensus that has been saying for 3-6 months that:
- Global growth was accelerating;
- US growth was accelerating;
- US housing would bottom soon;
- The US labor market would strengthen materially;
- China is careening towards a banking crisis;
Speaking to the Shakespeare quote above, one has to wonder why consensus wasn’t more bearish on the slope of global growth given that both market prices and fundamental data have been telling us that Chinese demand has been slowing since 1Q10. Consensus has a habit of ignoring data points that don’t support its top long ideas. Given this institutionalized conflict, we find it best to remain both Duration Agnostic and permanently objective. Being a perma-bear or a perma-bull isn’t profitable across market cycles.
Fully understanding that consensus lacks a Global Macro Process to properly contextualize data like what we saw from China overnight allows us to manage risk around the key trading ranges. We’ll go through this in more depth on Friday in our 3Q11 Key Macro Themes presentation. Additionally, we’ll be digging into our long-China thesis a bit more. If you have any questions on this topic ahead of the call, please email us at .
Net-net, the key takeaway from today’s Chinese economic data is that growth in China aint as bad as the shorts would have you believe. In late June we called out short-interest at an all-time high in the MSCI China Index as a classic contra-indicator. With Chinese growth nowhere in the area code of where China perma-bulls hope it is and inflation setting up to slow sustainably post June/July, we continue to expect more short-squeezing in Chinese equities – perhaps just enough to make the charts look good enough on the long side for some of the bigger players in our industry.
Ride the wave.