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

<p>Chinese offshore equities have continued to be among the best performing financial assets in the world over the year-to-date, but the risks are now rising in five main areas:</p><ol><li>a shift in the global currency regime in favour of the dollar;</li><li>the growing reliance on monetary and fiscal stimulus measures to maintain growth at a level deemed acceptable by the Chinese authorities;</li><li>the deterioration in the relationship with the US which goes beyond the most pressing trade issues and Korea;</li><li>the rise in moral hazard across much of the listed corporate sector, including private sector enterprises as well as state-controlled enterprises;</li><li>the potential cessation or reversal of significant southbound flows from the mainland into HKSE listed Chinese companies and of global investor flows into US-listed Chinese IT stocks and into emerging market equity ETFs in which offshore listed Chinese companies are by far the biggest weighting.</li></ol><p>From a more governance based perspective, Beijing will continue to shift towards an even more authoritarian investment regime, in which the rules for offshore listed Chinese companies as well as their A-share peers are set by the state and by mainland investors who are relatively insensitive to fundamental and valuation related factors. This presents overseas investors with a huge problem, given the increasing dominance of Chinese equities within the emerging market universe and the tidal wave of liquidity which is currently sweeping through the non-A-share market. Investing in Chinese equities is increasingly becoming an act of faith in Beijing’s ability to indefinitely control and sustain what is becoming a more closed economy and financial system.</p>

Chinese offshore equities have continued to be among the best performing financial assets in the world over the year-to-date, but the risks are now rising in five main areas:a shift in the global currency regime in favour of the dollar;the growing reliance on monetary and fiscal stimulus measures to maintain growth at a level deemed acceptable by the Chinese authorities;the deterioration in the relationship with the US which goes beyond the most pressing trade issues and Korea;the rise in moral hazard across much of the listed corporate sector, including private sector enterprises as well as state-controlled enterprises;the potential cessation or reversal of significant southbound flows from the mainland into HKSE listed Chinese companies and of global investor flows into US-listed Chinese IT stocks and into emerging market equity ETFs in which offshore listed Chinese companies are by far the biggest weighting.From a more governance based perspective, Beijing will continue to shift towards an even more authoritarian investment regime, in which the rules for offshore listed Chinese companies as well as their A-share peers are set by the state and by mainland investors who are relatively insensitive to fundamental and valuation related factors. This presents overseas investors with a huge problem, given the increasing dominance of Chinese equities within the emerging market universe and the tidal wave of liquidity which is currently sweeping through the non-A-share market. Investing in Chinese equities is increasingly becoming an act of faith in Beijing’s ability to indefinitely control and sustain what is becoming a more closed economy and financial system.

China: The Dollar for the Short Term, Governance for the Long Term