Macro Monitor, December 26, 2023
All the Tea in China
Here is a look back and a look forward.
2023 has been a remarkable year and has proven that consensus views do not get rewarded by the market. I plead guilty to having subscribed to many of the pop narratives.
The credit crunch and recession never came. Earnings dipped but did not crater. Instead of going to $150 a barrel, oil went to $75, despite a new war in the Middle East.
Although the Fed jacked the overnight Fed Funds rate 100 basis points, longer-dated Treasury yields did a round trip. The ten-year is at 3.88% this Christmas, just a few basis points from where it was trading last Christmas.
This table is a nice summary of how my favorite instruments performed.
The highlighted iShares MSCI China ETF “MCHI” seeks to track the investment results of an index composed of Chinese equities that are available to international investors. In 2023, Chinese stocks underperformed US stocks by a whopping 40%.
A host of negative fundamental factors are obstructing financial flows to Chinese equities:
The real estate market is in crisis, with deflation in some housing prices
Infrastructure spending is no longer an effective fiscal alternative way out, following the law of diminishing returns.
President Xi continues to intervene in publicly-held companies, elevating regulatory risk.
The economy never recovered from its 2022 Covid lockdown.
None of the factors mentioned above are new China themes. The consensus view is that China is suffering from an incurable demographic problem and is likely to see ever-increasing financial strain from its bloated shadow banking sector. Consumer confidence is low and the latest monetary and fiscal incentives from the government have had little effect on animal spirits. Indeed, the more the government tries to oil the economic machine, the stronger the perception that there is even more rot to be sanitized.
Did I hear that cursed word “consensus?” Is China a contrarian opportunity?
A year ago, Samuel Bankman Fried’s Crypto Exchange FTX went bankrupt, with investors and depositors losing billions from the fraud. Bitcoin crashed to $17.000 and became one of the most hated assets on investors’ radars. Even Bitcoin loyalists warned that the worst was yet to come.
A year later, Bitcoin is at $43,000, up 250% in 2023, even outperforming the leader of the Magnificent Seven Nvidia, up 225% on the year. Nasdaq as a whole was “only” up 43%.
There is no reason to expect a near-term improvement in Chinese fundamentals, but perhaps most of the bad news is already seeped into the tea. Unexpected good news will move the market less than expected bad news. The asymmetry is clear.
China, today’s most hated investment, may be the sleeper of 2024.
Here is this week’s Macro Monitor, again reading risk-on. Our Macro Model stays long.
Disclaimer: The views contained herein are those of the author and do not necessarily reflect the views of Armor Capital.