Tide May be about to turn
John Leiper – Chief Investment Officer – 4th May 2021
The narrative of 2020 equity market losers becoming 2021 winners has played out so far this year with the rotation out of growth stocks and into value and more cyclical parts of the market. This theme is also evidenced by China’s notable reversal of fortunes.
This pivot can be attributed to several factors:
- China is at a different point of the economic cycle meaning policymakers are now normalising monetary policy at a faster rate than peers, sapping liquidity from markets
- Recent regulatory crackdown on China’s domestic tech giants
- Technical selling, catalysed by the hedge fund Archegos Capital Management which led to additional selling pressure following a margin call on its long position in Viacom CBS
However, there are growing signs the tide may be about to turn. As shown in the chart below, there is a clear inverse relationship between the MSCI China and MSCI Emerging Markets Ex-China indices, which tends to move in cycles and does so with remarkable symmetry over time. If historical correlations hold true, the relative performance of Chinese equities to emerging markets in general may be about to bottom and could rebound and outperform going forward.
Our preferred way to play this theme is via Chinese technology companies whose Q4 earnings have come in strong, suggesting the shift to online spending has continued even as the pandemic has receded. This is consistent with the People’s Bank of China’s supposed strategic direction given recent pilot programs trialling a new digital currency in conjunction with several internet firms, such as Ant’s Mybank and Tencent’s WeBank. Moreover, ongoing regulatory impact could prove muted as US-China technological and geopolitical rivalry continues to escalate. Finally, we think investors could also benefit from a potential currency tailwind. As the US ramps up public spending, Beijing’s relative fiscal prudence could prove renminbi bullish, contributing to a rise in Asian currencies more broadly.
Bottom line, a continuation of the growth-value rotation will continue to hurt technology stocks. However, unlike US mega-cap tech stocks, we see further upside in countries such as China whose economy continues to transition from an industrial export-led model towards services.
This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.
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