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

<h2><strong>Main Conclusions </strong></h2><ul><li>There is no immediate indication of an end to either of the twin flows into Chinese offshore equities, namely global investors into tech stocks and mainland Chinese investors into Hong Kong. History usually shows however that the higher these sorts of trades go, the greater the eventual downside and we have no reason to think that it will be any different this time around.</li><li>The external environment has been extremely supportive with the weak dollar alleviating capital outflow pressures, while the Chinese economy is a prime beneficiary of lower energy prices. We believe that the dollar weakness is largely played out, while energy prices will remain weak over the remainder of 2017.</li><li>Beijing’s increasingly intense efforts to restrict capital outflows appear to be paying off, but there are still strong underlying pressures to export capital on the part of both households and corporations. There is also a strong likelihood of renewed trade tensions with the US over the coming months, which may rekindle fears concerning the current account surplus.</li><li>This period of apparent stability in the economy and corporate is increasingly reminiscent of the complacency which pervaded through Chinese and broader emerging financial markets through much of 2010 and into 2011, before the full extent of the structural deterioration caused by the massive post-GFC monetary stimulus became widely recognised.</li><li>The Chinese offshore market(s) is no longer so cheap following the admission of the US-listed technology stocks into the most widely followed indices. We remain sceptical about the superficially attractive valuations in the ‘old economy’ sectors of the offshore market(s) given the underlying financial fragility, which has been temporarily masked by the massive fiscal and monetary stimulus.</li></ul>

Main Conclusions There is no immediate indication of an end to either of the twin flows into Chinese offshore equities, namely global investors into tech stocks and mainland Chinese investors into Hong Kong. History usually shows however that the higher these sorts of trades go, the greater the eventual downside and we have no reason to think that it will be any different this time around.The external environment has been extremely supportive with the weak dollar alleviating capital outflow pressures, while the Chinese economy is a prime beneficiary of lower energy prices. We believe that the dollar weakness is largely played out, while energy prices will remain weak over the remainder of 2017.Beijing’s increasingly intense efforts to restrict capital outflows appear to be paying off, but there are still strong underlying pressures to export capital on the part of both households and corporations. There is also a strong likelihood of renewed trade tensions with the US over the coming months, which may rekindle fears concerning the current account surplus.This period of apparent stability in the economy and corporate is increasingly reminiscent of the complacency which pervaded through Chinese and broader emerging financial markets through much of 2010 and into 2011, before the full extent of the structural deterioration caused by the massive post-GFC monetary stimulus became widely recognised.The Chinese offshore market(s) is no longer so cheap following the admission of the US-listed technology stocks into the most widely followed indices. We remain sceptical about the superficially attractive valuations in the ‘old economy’ sectors of the offshore market(s) given the underlying financial fragility, which has been temporarily masked by the massive fiscal and monetary stimulus.

China (Underweight): Equities Driven by Stimulus & Flows, Not Reform (Part 2 of 6)