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Weekly Manager Views

11 October 2019

At GAM Investments’ Weekly Investment Meeting held on 9 October 2019 the speakers were Jian Shi Cortesi, who discussed her views on Asia and China equities, and Lars Jaeger, who emphasised the importance of ARP strategies being diversified.

Asia / China Growth Equities

Jian Shi Cortesi

  • A look at the long-term performance across Asia and China reveals four distinct down cycles across a 14 year period. Each down cycle corresponds to a significant macro event or concern, specifically the 2008 financial crisis, the 2011 eurozone crisis, the 2015 Chinese yuan fear and the ongoing trade war. Psychologically, investors may struggle to buy during such a low point in the market; we feel negative investor sentiment is the reason for the current level at which Asia and China equities are trading.
  • Despite these concerns, we see some reasons to be optimistic. Two positive factors include policy easing in China and other Asian countries, indicating supportive monetary and fiscal policies, as well as a supportive global environment, as seen by the Federal Reserve’s rate cuts. In our view, these factors would enable stocks to trade at a higher level were it not for additional macro concerns.
  • The aforementioned trade war between the US and China does remain something of a negative, as the media narrative impacts market sentiment on a daily basis. In our opinion, the size of each economy is contributing to the current stalemate. China’s economy is 70% the size of the US economy at present, and it is actually larger than the US economy in purchasing power parity terms. At this point, we believe the most sensible political move would be for both sides to find a common ground; however, we recognise that any sign of perceived surrender from President Trump would likely incur criticism domestically in the lead up to the presidential election.
  • We believe consumption and innovation are two powerful long-term trends across the Asian market, particularly over the last decade. According to the IMF, the aggregate consumption of the Chinese economy will reach 74% of US levels by 2027. As China moves away from its reputation as ‘the world’s factory,’ we have also witnessed a spike in technical innovation. The government initiative ‘Made in China 2025’ is a clear sign that the country hopes to upgrade its manufacturing industry, especially when faced with a growing middle class and an increasing desire for digital growth.
Alternative Risk Premia

Lars Jaeger

  • 2018 was a difficult year for most asset classes and investment strategies and, as we have noted previously, alternative risk premia (ARP) was no exception, although well diversified approaches typically fared better than those with structural biases. In our view, the intrinsic diversification inherent in ARP approaches should mean substantial drawdowns are less frequent than those seen in traditional investment styles, which typically adopt long exposure to a single asset class and are therefore hostage to overall market directionality to a large extent.
  • So far this calendar year we have seen the opposite effect, with strong performance from asset classes including from the ARP space, although as is often the case there has been a wide dispersion of returns.
  • September’s reversal in bond markets highlights the importance of being diversified across asset classes and indeed styles. Investors focused on the momentum style have likely been benefiting from the long bond rally, but this would have come to an abrupt end last month as yields spiked. We have also witnessed some market sector rotation, with the spread between value and growth areas increasing, which could have proved problematic for strategies with a strong momentum bias.
  • There remains a conundrum around value and why it has performed so poorly relative to growth for such a long period. There has been much discussion about structural shifts occurring in markets, and while we see some validity in this argument we are hesitant to draw a conclusion at this point as history has shown markets tend not to change very quickly. Therefore this is one to watch.
  • Another area we are watching for signs of material change is commodity trend, which has also experienced weakness this year. Again there is a suggestion that time horizons for those hedging commodity markets are shortening; if this proves to be true it would provide a more economically / fundamentally sound reason for us to review how best to capture risk premia in this area but for now we are monitoring this closely.
  • Against such a backdrop, with both winners and losers across the board, we believe it is essential for investors to avoid style bias and tap into a diverse array of return drivers in order to bring portfolio stability.
  • We remain focused on investment research, seeking out areas of exposure which can benefit from this shift. Allied to this we believe experience is key.

Important legal information
Source: GAM unless otherwise stated.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a security is not a recommendation to buy or sell that security.