Earlier this afternoon, we hosted a live conference call on China which detailed our revised outlook for the Chinese economy, our expectations for monetary and fiscal policy, as well as the associated investment implications.
Watch the video replay of the presentation below.
CLICK HERE to download the associated presentation in PDF format.
Section One: Correction or Collapse? (slides 4-33)
- Summary: China’s secular growth outlook is likely more dour than the average “China bear” is willing to admit, which implies the recent margin-fueled melt-up in Chinese equities is little more than a bubble that has now popped. Conversely, the outlook for capital markets reform in China is supportive of expectations for much higher share prices over the intermediate-to-long term. While we view these conflicting forces as a fair fight, we are inclined to side with the stated reform drive of Chinese policymakers and believe the key decision an investor has to make with respect to adopting a bullish or bearish stance on Chinese equities from here is how much they believe in the efficacy of the “Beijing Put”. All told, we are happy sheep – for now at least.
Section Two: Asset Class “Re-Rotation” Risk (slides 34-63)
- Summary: Our analysis is picking up on a positive inflection in the Chinese property market. To the extent this nascent recovery is sustained, we expect two things to occur: 1) mainland Chinese investors are likely flow capital back into real estate in lieu of stocks, at the margins; and 2) Chinese economic growth is likely to stabilize and potentially inflect higher from a cyclical perspective. The latter is key risk for the Chinese equity market(s) in terms of reduced expectations for fiscal and monetary stimulus.
Section Three: RMB Internationalization Impact (slides 64-73)
- Summary: Ahead of this year’s likely rebalancing, Chinese policymakers have lobbied strongly in favor of the yuan to be included in the IMF’s Special Drawing Rights (SDR) basket. Regardless of any near-term success with this initiative, we believe Chinese policymakers are serious regarding their pledge(s) to accelerate capital account reform. We believe an incrementally deregulated Chinese capital account will prove to be a positive influence upon both the Chinese and global economy.
Associated Investment Implications (slide 74)
- Summary: Over the intermediate term, we think H-Shares represent an active opportunity on the long side but are cognizant of the elevated spillover risk resulting from another potential leg down in the A-Shares. Longer term, however, we think both markets are poised to trade materially higher amid the confluence of key capital markets and capital account reforms. Meanwhile, China’s secular growth outlook should continue to impart deflationary pressure upon commodity prices and the nominal exchange rates of commodity-producing nations.
As always, please feel free to follow up with any questions. There are lots of moving parts here to discuss.
The Hedgeye Macro Team