This morning’s Bloomberg log-on bon mot was a quote by one Oliver Wendell Holmes Jr who sat on the US Supreme Court and was briefly Acting Chief Justice in 1930 which read: “Insanity is often the logic of an accurate mind overtaxed.” Thank you sir; that’s me justified.
While dealing with quotes and before looking at the mad rebound rally by the Chinese stock markets yesterday, I’d like to share with you some thoughts of Zsolt Papp, head of Emerging Markets Fixed Income at JP Morgan Asset Management which nearly had me choking on my toast and honey this morning.
He appeared on CNBC’s Opening Bell programme and spoke otherwise very eloquently on the problems which emergers are suffering, especially on the currency front. It’s not easy, I must grant him, to be speaking for an asset class which is universally deemed to be in the dog-house and which is principally making headlines for the fact that in the last 13 months nigh-on one trillion dollars of foreign investment has been withdrawn.
EM is and always has been the next big thing. I was deeply involved in it around the time it was rebranded from Third World Debt to LDC (Lesser Developed Countries) debt but long before it was again rebranded to Emerging Markets. I think I can safely say that in that 35-year period, the only economy to truly emerge and to join the elite of developed economies is South Korea; the rest of them pop their heads up and down. Even Greece, you may recall, has been put back in the EM basket by some of the ratings agencies.
Anyhow, Papp was chatting away when he came up with the pearler which nearly did for my breakfast. He suggested that it could be defensive to move out of the liquid EM credits and into some of the less liquid ones in order to avoid the wrecker’s ball when it comes swinging in the direction of the asset class. Is he really being serious?
Who can forget – other than the current crop of traders and junior fund managers who were still at university when the brown stuff hit the propeller in 2007–08 – how hedge funds got slaughtered by their illiquid holdings. They, too, had assumed that if they held assets which barely trade that they could avoid mark-to-market volatility which would damage their net asset values. The hedgies fell into the trap of believing that if they held an asset which didn’t trade, such as a private placement, and for which there was no visible “print”, they could more or less leave it on the books at cost.
Papp is right in as much as that daily price swings are lower but sooner or later the relative weighting of assets in the portfolio needs to be re-established. Reducing short-term volatility does not preclude medium-term price adjustments.
More to the point, if significant value is lost in assets with heavier portfolio weighting, then lesser assets will need to be reduced in order to bring their weighting back in line with the benchmark. Thus, ’ere long, they too will find themselves being revalued and if they are illiquid, that revaluation will be fierce and painful. It’s not a quiz!
Well, that’s that off my chest and so back to Chinese stock markets.
I opened my column yesterday with: “It’s a tricky task trying to write about how much the Shanghai Composite has gone up or down in a day if one is typing away before the market has closed for it can turn around any chosen number of percentage points either way in as many minutes.”
At that point I was not aware that the market, having been down at one point in the day by 5½% was being bought up by the PBoC which would lead it to end the day about 1.4% in the plus.
As recently as the end of last week, the Beijing authorities had declared that they had done their thing and that they were now going to stand back and let market forces take over. Three days later they were back in. So they are now in control of the currency and in control of the stock market. Will somebody now please be kind enough to agree with me that they are also in control of the economic statistics and there too we only see what they want us to see?
Whether the Chinese economy grows by 5% or 6% or 7% is not really all that relevant as long as it is still growing and that it appears to be the case. The past year should have taught anybody with a triple digit IQ that there is barely more of a correlation between China’s economic performance and the value of stocks in Shanghai than there is between its declared growth figures and the probability of Red 17 coming up twice in a row on a roulette table.
I repeat the advice given by “Moff” at Joseph Palmer & Sons to forget the obsession with percentage growth for a moment and to focus on the nominal value of Chinese year-on-year expansion. Markets are getting themselves into a terrible stew as they now seem to be driven by a bunch of folks who don’t know what’s going on and therefore have reverted to trading on the basis of full speed ahead or full speed reverse. Now might be the time to switch off the Bloomberg and to do some fundamental research work. Overall, the economies of the leading nations are not in such a bad shape.
Even France looks better than it has done despite all of Francois “Qui? Moi?” Hollande’s efforts to drag it back into the 1950s. He was on the wires last night for having declared that if the economy begins to grow again, he would consider cutting taxes. Doesn’t that one normally work the other way around? I think he’s been listening to that Jeremy Corbyn again.
Alas, for me it is that time of the week again as I shall be out tomorrow. In fact, I shall be out for quite a few of the Fridays coming.
Therefore, for the few who are still in the office, please let me wish you and yours a happy and peaceful weekend ahead. My absence due to the accident has prevented me from gloating over the Ashes but it has not diminished my interest. On the contrary. As I am not allowed into the sunshine, I was looking forward to sitting indoors and watching the cricket but the Australians buggered that up by losing the last two five day games in just three. The weather is now a bit dodgy and with the help of a few rain breaks the final match at the Oval might in fact last for five. Hurrah!
