Global Head of Research, Smartkarma

Mark Artherton

Global Head of Research

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.

Macroeconomics

We have surveyed over 2000 Chinese companies, which have reported detailed accounting information for 2015.  From this data, we have created a combined Cash flow statement for ‘China Ltd’ and reviewed the change in key margins in the income statement. Our analysis highlights an improvement in operating cash generation and an improvement in general cash levels that is masking a continued underlying deterioration in the position of corporate China. We pay particular attention to the materials and capital good sectors, which are most symptomatic of the broader economy and highlight the main challenges facing policymakers.The winners in 2015 have unsurprisingly tended to be those sectors which consume commodities namely utilities, commodity chemicals, and fertilisers, all of which have seen big declines in their main input costs while the upstream commodity producers have obviously been the main losers. The fiscal and monetary stimulus has also begun to have an impact in the form of higher CapEx rates in the capital goods sector.Our main concerns remain the ongoing fall in economy-wide ROIC and the build up in working capital days, which had an overall beneficial effect on corporate cash flow in 2015, but which is indicative of a system under stress. The overall decline in CapEx, recorded in 2015 is also symptomatic of company managements taking actions to preserve cash which are rational for individual companies but which then collectively lead to a weaker economy.Against this backdrop and without serious reforms to introduce more market driven cost factor inputs and reduce overcapacity, the positive effect of the stimulus efforts on earnings will be temporary; investors should not mistake the liquidity and cash improvements in 2015 for anything, other than a one-off positive confluence of events in our view.

We have surveyed over 2000 Chinese companies, which have reported detailed accounting information for 2015.  From this data, we have created a combined Cash flow statement for ‘China Ltd’ and reviewed the change in key margins in the income statement. Our analysis highlights an improvement in operating cash generation and an improvement in general cash levels that is masking a continued underlying deterioration in the position of corporate China. We pay particular attention to the materials and capital good sectors, which are most symptomatic of the broader economy and highlight the main challenges facing policymakers.The winners in 2015 have unsurprisingly tended to be those sectors which consume commodities namely utilities, commodity chemicals, and fertilisers, all of which have seen big declines in their main input costs while the upstream commodity producers have obviously been the main losers. The fiscal and monetary stimulus has also begun to have an impact in the form of higher CapEx rates in the capital goods sector.Our main concerns remain the ongoing fall in economy-wide ROIC and the build up in working capital days, which had an overall beneficial effect on corporate cash flow in 2015, but which is indicative of a system under stress. The overall decline in CapEx, recorded in 2015 is also symptomatic of company managements taking actions to preserve cash which are rational for individual companies but which then collectively lead to a weaker economy.Against this backdrop and without serious reforms to introduce more market driven cost factor inputs and reduce overcapacity, the positive effect of the stimulus efforts on earnings will be temporary; investors should not mistake the liquidity and cash improvements in 2015 for anything, other than a one-off positive confluence of events in our view. 

China; Liquidity Improvement Masks Underlying Deterioration