Recession remains a threat, and despite official figures, China is almost certainly in a phase of contraction
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Asset markets came to a somewhat belated realisation that central banks are riding a tiger they cannot dismount. Not without breaking something. Inflation vigilantism from the Federal Reserve, an ‘ostrich head in the sand’ attitude by the Bank of Japan and normal cluelessness in the European Central Bank are a deadly cocktail. Markets sold off across the board.
Surviving in this environment was a whack-a-mole game. You know that feeling – smugness – thinking you own the right stocks, which survived the carnage today? In this kind of a market that lasts for a day; despair follows. I did add to our Chinese holdings while reducing stocks in Korea, India and the Philippines. Perhaps, July could be a month of masterful inactivity.
Advocates of the crypto asset class promised nirvana. Most seem to be staring into the abyss. The concept of blockchain is powerful. Human greed manifest in wanton speculation based on leverage is the folly. Neither central banks nor governments will (hopefully) bail out losers. The repercussions on the broader financial system might be limited. Yet, the loss of actual and perceived wealth, shut downs of several start-ups and layoff’s in general might be worth watching. Simultaneously, job creation in general could suffer as business confidence wanes.
In Asia, inflation is the new deflation. China’s economy is in a recession no matter what the authorities say. The back of the housing market is broken. Demand is weak and reviving animal spirits a tall ask. Property developers can survive only if they liquidate inventory by slashing prices or are nationalised. That is a vicious circle. The back end effects on steel, cement and other construction materials is looking dire as inventories pile up. In deflation, stocks like Wuliangye (second largest baiju maker), Qianhe Condiments (niche and innovative condiment company) and Budweiser APAC (the Asian arm of the beer firm) are great businesses to own. After the brutal sell-off in the past year, in my opinion, the valuations are fair to cheap.
Korea and Taiwan meanwhile are buffeted by global slowdowns. India, thus far the darling for many investors, is an expensive place to hide. Margins and growth will likely be under pressure. The long-term story sounds sweet but we need to see much lower valuations. Overall, my switch from India to China is one of conviction.
Samir Mehta is Senior Fund Manager on the JOHCM Asia ex Japan Fund. Learn more about the fund here.
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