Global Asset Allocation, Politics & Governance, Ecstrat

John-Paul Smith

Global Asset Allocation, Politics & Governance

Ecstrat

Ecstrat is a consultancy advising on asset allocation between global equity markets, with a focus on the intersection of governments, geopolitics, governance and markets.
 
Over the past few years and more especially since the Great Financial Crisis (GFC), investors have become more focused on short-term market movements and real-time returns and have consequently neglected the analysis of the underlying structural themes that underpin longer term performance.
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More specifically we believe that the evolution of governance-based relationships between investors, controlling shareholders, labour and the state is one of the primary determinants of both relative and absolute performance between individual equity markets.
 
We will endeavour to provide investors with some of the context surrounding governance-related issues which encompass many different disciplines including history, economics and political science, as well as the financial metrics which are the most obvious manifestation of the structural characteristics of each market.
 
We will pay particular attention to the shifts and potential inflection points for governance in individual markets as these are often the best lead indicators for both economic and market performance.

Cross Asset Strategy

<div><div><div>Let me begin by revisiting the road map for the bear market in EM equities which I first outlined in my role as EM equity strategist for Deutsche Bank towards the end of 2010 and the start of 2011, at a time when the consensus outlook for EM economies and equities was almost unanimously bullish.</div><div>&nbsp;</div><div>I made a number of tentative predictions and recommendations, which were generally greeted with a combination of indifference and skepticism and on occasion outright hostility among most, though not quite all of the bank&rsquo;s clients.</div><div>&nbsp;</div></div></div><div><div><strong>It seems that we may now be entering the final stage of EM relative underperformance, in line with our expectations in our initiation last year where we posited the relative trade was 2/3rds through.</strong></div></div>

Let me begin by revisiting the road map for the bear market in EM equities which I first outlined in my role as EM equity strategist for Deutsche Bank towards the end of 2010 and the start of 2011, at a time when the consensus outlook for EM economies and equities was almost unanimously bullish.&nbsp;I made a number of tentative predictions and recommendations, which were generally greeted with a combination of indifference and skepticism and on occasion outright hostility among most, though not quite all of the bank&rsquo;s clients.&nbsp;It seems that we may now be entering the final stage of EM relative underperformance, in line with our expectations in our initiation last year where we posited the relative trade was 2/3rds through.

A Roadmap of the EM Bear Market and Three Myths about the China Bull Market

Chairman, sgtradex

Tan Chin-Hwee

Chairman

Thematic (Sector/Industry)

<p>Two years ago I recalled during May/June period, put premiums were at double digits for the biggest china financial stocks. It was dirt cheap at low valuation pricing (3x p/e; 0.8x p/b) pricing in worse cases scenario. Clear Buy.<br/><br/>In the last two months, US$1.7 trillion having been added to China&rsquo;s stock market capitalization with some Chinese valuations now look excessive (according to CLSA, <em>China&rsquo;s nine largest listed stock brokers have a combined market cap US$319bn</em>). Market is indeed hot, as an investor in a start-up P2P china financial portal-an additional 1 million new subscribers signed up in last 3 months! &nbsp;</p><p>Overall, the influx of foreign money will be a great time for the SOE sector to deleverage and the banks to recapitalize and write down their debt.</p>

Two years ago I recalled during May/June period, put premiums were at double digits for the biggest china financial stocks. It was dirt cheap at low valuation pricing (3x p/e; 0.8x p/b) pricing in worse cases scenario. Clear Buy.  In the last two months, US$1.7 trillion having been added to China&rsquo;s stock market capitalization with some Chinese valuations now look excessive (according to CLSA, China&rsquo;s nine largest listed stock brokers have a combined market cap US$319bn). Market is indeed hot, as an investor in a start-up P2P china financial portal-an additional 1 million new subscribers signed up in last 3 months! &nbsp;Overall, the influx of foreign money will be a great time for the SOE sector to deleverage and the banks to recapitalize and write down their debt.

A herd of fine horses are starting to head back to their home market

Macro Strategist, Saxo Capital Markets

Kay Van-Petersen

Macro Strategist

Saxo Capital Markets

<p>Whilst a lot of people &ndash; internally here as well &ndash; are in the no CNY devaluation Camp on the renminbi, see a good piece on this from <a href="http://www.economist.com/news/finance-and-economics/21644205-devaluing-yuan-would-do-china-more-harm-good-currency-peace" target="_blank">The Economist.</a> I am surprised by Sunday&rsquo;s easing from the PBOC &ndash; not that they eased, but that it has come so quickly post the triple RRR cut.</p><p>The most likely read from all this, is that the Chinese economy is not only in decline mode with no sign of improvement so far, but is in potentially worse shape than most officials perceived.</p><p>And its not easy turning a ship much bigger than the Titanic, I would also be concerned if I was at the helm of that vessel.</p>

Whilst a lot of people &ndash; internally here as well &ndash; are in the no CNY devaluation Camp on the renminbi, see a good piece on this from The Economist. I am surprised by Sunday&rsquo;s easing from the PBOC &ndash; not that they eased, but that it has come so quickly post the triple RRR cut.The most likely read from all this, is that the Chinese economy is not only in decline mode with no sign of improvement so far, but is in potentially worse shape than most officials perceived.And its not easy turning a ship much bigger than the Titanic, I would also be concerned if I was at the helm of that vessel.

MACRO: IS A CHINA RENMINBI DEVALUATION ON THE CARDS?

Portfolio Analyst, River Capital Growth Fund, River Capital

Vishal Hargovan

Portfolio Analyst, River Capital Growth Fund

River Capital

<p>Initiating 1 year USDCNH Vanilla Call Option with Strike 7.0000. This trade is one way to take advantage of/hedge against potential currency devaluation in the Renminbi. It is effectively a call on the USD/put on the CNH. Admittedly, not my normal style of value based equity investing, but this trade aligns with how I tend to think about mis-priced securities in general. I think the premium on the above call option (~5.5 basis points, SaxoBank Webtrader, or much lower, &lt;2 basis points, if you are an Insto trading through an FX desk) is under-priced as it does not fully factor in the heightening tail risk of major capital flows out of China. Too much faith is being put in the Chinese government supporting the Renminbi when, in my view, it&rsquo;s in their <strong>long term interests</strong> to allow their currency to devalue.</p>

Initiating 1 year USDCNH Vanilla Call Option with Strike 7.0000. This trade is one way to take advantage of/hedge against potential currency devaluation in the Renminbi. It is effectively a call on the USD/put on the CNH. Admittedly, not my normal style of value based equity investing, but this trade aligns with how I tend to think about mis-priced securities in general. I think the premium on the above call option (~5.5 basis points, SaxoBank Webtrader, or much lower, &lt;2 basis points, if you are an Insto trading through an FX desk) is under-priced as it does not fully factor in the heightening tail risk of major capital flows out of China. Too much faith is being put in the Chinese government supporting the Renminbi when, in my view, it&rsquo;s in their long term interests to allow their currency to devalue.

Systemic problems in China – Is the Renminbi set to tumble?

Head of China Research - Forsyth Barr Asia, Forsyth Barr Asia

David Millhouse

Head of China Research - Forsyth Barr Asia

Forsyth Barr Asia

<p>There is a growing expectation that mergers involving huge state-owned conglomerates could be part of China's soon-to-be-announced reforms of state-owned enterprises, according to a report in today's Securities Daily. Li Jin, deputy head of the China Enterprise Reform and Development Society, said that state-dominated industries with problems of overcapacity, namely construction, electricity and rail would "face large scale mergers and restructuring". The article also notes that rumours of mergers in the construction, energy and telecommunications industry have been circling for a while now. The mergers could help reduce excessive competition between large SOEs, cut waste, encourage the formation of huge conglomerates that could better compete against large foreign firms and also assist in the internationalisation of the Chinese yuan. &nbsp;<strong>Below we look at what sectors and stocks could be effected.</strong></p>

There is a growing expectation that mergers involving huge state-owned conglomerates could be part of China's soon-to-be-announced reforms of state-owned enterprises, according to a report in today's Securities Daily. Li Jin, deputy head of the China Enterprise Reform and Development Society, said that state-dominated industries with problems of overcapacity, namely construction, electricity and rail would "face large scale mergers and restructuring". The article also notes that rumours of mergers in the construction, energy and telecommunications industry have been circling for a while now. The mergers could help reduce excessive competition between large SOEs, cut waste, encourage the formation of huge conglomerates that could better compete against large foreign firms and also assist in the internationalisation of the Chinese yuan. &nbsp;Below we look at what sectors and stocks could be effected.

CHINA SOE REFORM: Detailed plan due in the next 3 weeks. Potential implications  

China

China Construction Bank Corporation provides a comprehensive range of commercial banking products and services to individuals and corporate customers. The Bank's business consists of three principal business segments: corporate banking, personal banking, and treasury operations. China Construction Bank also services infrastructure loans, residential mortgage, and bank cards.

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China Construction Bank H (939 HK)

A Roadmap of the EM Bear Market and Three Myths about the China Bull Market

Let me begin by revisiting the road map for the bear market in EM equities which I first outlined in my role as EM equity strategist for Deutsche...

John-Paul Smith

A herd of fine horses are starting to head back to their home market

Two years ago I recalled during May/June period, put premiums were at double digits for the biggest china financial stocks. It was dirt cheap at...

Tan Chin-Hwee

MACRO: IS A CHINA RENMINBI DEVALUATION ON THE CARDS?

Whilst a lot of people – internally here as well – are in the no CNY devaluation Camp on the renminbi, see a good piece on this from The Economist....

Kay Van-Petersen

Systemic problems in China – Is the Renminbi set to tumble?

Initiating 1 year USDCNH Vanilla Call Option with Strike 7.0000. This trade is one way to take advantage of/hedge against potential currency...

Vishal Hargovan

CHINA SOE REFORM: Detailed plan due in the next 3 weeks. Potential implications

There is a growing expectation that mergers involving huge state-owned conglomerates could be part of China's soon-to-be-announced reforms of...

David Millhouse

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52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)