Amid the setback brought by COVID19, the world is experiencing a harrowing rise in unemployment and a total shock from demand and supply. What should investors be prepared for in their portfolio?
V-shape recovery unlikely
In our view, V-shape recovery is highly unlikely. Judging by the current outlook, we believe the recovery will come with a shape of U or W, meaning that we may hover at the bottom for some time and then recover. Moreover, we cannot rule out the possibility for markets like the U.S., which may suffer in an L-letter like trajectory or a long-lasting recession.
Within the system, we have seen a combination of multiple shocks – on demand, supply, and financial market and increasingly, on the political front. The crisis has severely hurt this year’s growth outlook. Based on the International Monetary Fund’s projection, the U.S. GDP is estimated to decline by 5.9% in 2020. In 2009, the year with the most significant impact of the global crisis, the U.S. fell 2.5% in comparison. For China, the GDP is projected to grow 1.2% in 2020, versus a 9.4% growth after the colossal stimulus introduced by authorities.
Moreover, the health crisis has hit the headlines as a “once in a century event” with some governments openly defining that the humanity is at war. The crisis can turn into one of the worst economic crises like the Great Depression dated back in the 1930s.”
To the extent possible, central banks around the world, which includes China, are still willing to use their balance sheets to support asset prices and employment.
In fact, two countries in the world, the United States and Australia, their central banks have openly said they would do unlimited quantitative easing (QE). The U.S. balance sheet is infinite because the world is hooked on the greenback. As long as they own a money printing machine, they can print any amount of U.S. dollars they want to buy anyone who wants to sell assets. This is the reality of unlimited QE. So you have to put part of your portfolio on the attack side to take part in this.
Attack – China Active fund thrives
The suggested attack strategy is buying China which presents active opportunities. As a value investor, we see the phenomenon that it is not so easy for active investors to leverage in-depth research and to visit companies with a vast analyst team to outperform efficient markets. In China, however, active funds can still outperform.
Figure 1: Active funds outperform due to market inefficiencies
Looking at the Figure 1, we know that if you are a professional who works hard on research, you can still do quite well in obtaining alpha. More, if you invest in a contrarian style, you can also outperform. This is partially attributed to the fact that professional investors do not dominate China’s market, with 80% of the investors in China are retail.
Through institutional quality research, professional investors who understand valuation will buy when the market is low and sell when the market is high.
Amid the crisis, China showcases its strength in domestic power and idiosyncrasy in the market structure. The country enjoys a vast local market. Also, the partial restriction in capital flow adds a buffer and enables the country to rely on its resources to recover.
The Chinese system and culture of state capitalism and strong government has proved to be effective. On top of that, China still has significant room for reforms and economic stimulus, including a broader policy ammunition of China than, for example, of the U.S.
China’s story is intact. The country remains on track to becoming the world’s biggest economy by roughly 2030. The room available for Beijing is not just interest rates cut or tax reduction. There is a potential for real critical structural reforms, including the development of the city cluster like Greater Bay Area, and for example, the Internet of Things (IoT) and market-opening reforms, all of which will make the country even more competitive.
In the next issue, we will list the reasons to be bullish on gold and illustrate how it could serve as a defense strategy for global investors.
The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable as of the date of presentation, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
This commentary has not been reviewed by the Securities and Futures Commission of Hong Kong. Issuer: Value Partners Hong Kong Limited
