Investing in Chinese stocks inexorably provokes a contrasting feeling, a mixture of fascination and anxiety. This is reminiscent of the tempting flowers one wishes to pick at the edge of a cliff, "The Flowers of Evil," by Charles Baudelaire who revolutionized French poetry at the end of the nineteenth century.
Among the various investment strategies, the one proposed by Gavekal-IS mitigates anxiety. Evergrande does not change the case. The conclusion remains the same on the Shanghai Stock Exchange Composite Index: risk on!
One year ago, facing the largest bond bubble in history, Gavekal-IS published “Bonds. Which Bonds?” focusing on four investment alternatives to US fixed-rate treasury bonds to protect income portfolios:
The four positions generated more than 20% alpha against US bonds, on average, which now raises the question of a possible over-extension of their outperformance.
Keep? Sell? Who knows?!
Unconventional monetary policy has led to the largest bond bubble in history; some 15 trillion dollars’ worth of debt globally, now providing negative yields. Bond holders from developed economies may have reason to worry about the future of their savings. History tells us, however, that perhaps they should simply put their feet up, and take a look at less crowded bond markets for inspiration.
As the year draws to a close, we have taken time to reflect on our Theory of Financial Fragility. As its track record develops day by day, it has highlighted certain lessons. In the new year, we recommend paying close attention to the two best-remunerating currencies of the past twenty years; Gold, and the Chinese Yuan. Their leadership will soon become particularly symbiotic.
Balanced investment portfolios intuitively combine fragile assets, such as most equities, and antifragile assets, such as government bonds from developed economies or precious metals, gold or silver. However, how does one choose the right antifragile asset? The answer depends on monetary policy.
There is no doubt that the Gavekal group has deeply planted Asian roots. The founders decided to headquarter in Hong Kong in 2001, anticipating China’s formal membership to the World Trade Organization (WTO), approved in December 2001. Gavekal Intelligence Software, the quantitative research arm of Gavekal, is based in France, but seems to stem from its parent company’s roots. Its first product −TrackMacro− has massively outperformed equity markets, bond markets, and hedge fund indices in Asia for three and a half years. This note details the AI model behaviour in Asia and the reason for its outperformance.