Summer has passed and so has the idea that the financial world was stepping off a precipice.
China, one of the main excuses for the doomsday scenario, seems to have stabilized. Actually
China is going through a once in a lifetime transition, moving from a 19th/20th century
manufacturing economy to a 21st century service/consumer driven one. Current statistics
suggest that it is roughly half accomplished. So this is a classic case of the glass being half full
or half empty. Manufacturing is slowing thereby giving voice to those who have embraced the
thesis that China’s economy is seriously slowing down. Yet if one would bother to review
China’s focus on service and consumer, one would likely discover that these sectors are
growing double digit.
In the meantime, the Chinese government and the central bank, the PBOC, have added stimuli
to the system and with the 5th Plenary Session of the Communist Party Central Committee
scheduled for late October, it is likely that there will be additional fiscal and monetary support
before year end. Rather than a hard landing it is most likely that the Chinese economy is heading
for a rebound.
This presents a rather interesting situation for investors. With the horrors of July and August,
prior gains achieved during the year were mostly wiped out. As a result, both the A shares in
Shanghai and H shares in Hong Kong are near their 10-year low in valuation. Furthermore the
unexpected devaluation mid-August has driven out most of the “hot” money invested in China.
We therefore believe that China shares offer a unique opportunity for appreciation for those
who know China and understand how its system works.
In the US, financial markets were fully bracing for a rate hike based on Chair Yellen’s repeated
warnings about the normalization of interest rates by the Fed. The decision to raise rates was
pulled at the 11th hour with September’s labor report which revealed a third consecutive month
of labor softening. In addition, the FOMC was measurably troubled by developments overseas.
So now financial markets have two things to worry about, first how bad is the US economy and
are we slipping into another recession and secondly if not a rate hike in September, then would
it be October or December? The sword of Damocles continues to hang over our heads. At this
juncture, many among us would just as soon suffer a rate hike just so as to get it behind us!
This is just one of the many challenges confronting investors as we approach year end. We
believe that the Fed would be most reluctant to launch a normalization of rates with a hike
during a presidential election year. Yellen and company are politically astute enough not to
provide fodder for the Fed’s detractors in Washington. To us, the window closes for the Fed
after the December FOMC meeting. There is also genuine concern regarding the strength of the
economy going into next year in addition to all the political ramifications between Congress
and the White House. Therefore we believe that investors have to follow events in 2016 rather