China And Greece – Implications On The Financial

The global financial markets are still jittery and the twin worries (Greece and China) are playing on investors’ minds. Although anything can happen, it now appears as though a last minute deal between Greece and its creditors will materialise (gasp). If a deal is done on the creditors’ terms, the referendum will turn out to be a pointless and expensive exercise.  Why bother with an anti-austerity referendum vote if you will eventually cave in to a similar deal!?

Anyhow, it is not our job to try and figure out politicians’ actions.  As investment managers, our fiduciary duty is to observe what is happening in the economy/financial markets and make logical capital allocation decisions.

Earlier in the week, we sent out an alert to our Money Matters subscribers stating that we were raising 50% cash in our managed portfolios. We also said that if the S&P500 Index closed beneath its 200-day moving average, we would sell all our holdings and buy long dated US government bonds. 

On Wednesday, the S&P500 did close beneath the 200-day moving average, so on Thursday, we liquidated our remaining equity holdings and allocated 50% of our managed capital to 20-30 Year US Treasury Bonds.  So, this is how we are positioned as of now.

Look. If a Eurozone deal materialises over the weekend and the Asian stock markets react positively to this development on Monday, we will re-invest our 50% cash position in equities. Conversely, if nothing gets done by Sunday and Greece leaves the Eurozone, then early next week, we will add to our positions in US government bonds.   Given all the uncertainty and moving parts, we feel we must keep an open mind and react to the unfolding events. 

Turning to the real economy, there can be no doubt that global business activity is slowing down and the recent plunge in China’s stock market is a matter of concern. After all, China’s economy is worth US$11.2 trillion (similar in size to France, Germany, Italy, Spain and the UK combined!) and the recent smash in the A-shares cannot bode well for domestic consumption. 

According to CEIC/Credit Suisse, China is home to 258 million active stock trading accounts and about a third of those accounts opened in just the past nine months. Furthermore, when you factor in the high leverage/margin debt (US$370 billion at the peak or 8.5% of estimated free float) which is now deflating, you can see how the stock market crash may end up curbing domestic consumption.

For now, after taking various dubious steps (trading halts in 54% of the listed companies, selling bans on major shareholders for 6-months and threats of imprisonment to short sellers!)  Beijing has succeeded in sparking a relief rally in Chinese equities. However, we suspect that the ongoing advance will prove to be temporary and the tens of millions of highly leveraged retail investors in China will want to get out at any cost.

Unfortunately, this hair curling experience will probably scar their psyche for a long time and they may respond by cutting back on spending.  For instance, it was recently announced that China’s June auto sales fell by almost 2% year-on-year, the first contraction in over 2 years.  We suspect that over the following months, demand for things in China will continue to diminish; thereby contributing to the global economic slowdown.

Turning to Wall Street, the recent slide in the major US indices is a matter of concern and currently, the Dow Jones Industrial Average, the Dow Jones Industrial Average and the S&P500 Index are trading below the 200-day moving average.  More importantly, we have a nagging feeling that over the past 8 months, the S&P500 Index may have carved out a massive rolling top. 

After all, approximately 60% of the NYSE stocks are in a bear market already and only 39.71% of the NYSE securities are currently trading above the 200-day moving average. Furthermore, the number of new 52-week lows is now significantly greater than the number of new 52-week highs.

At this stage, we do not know whether we have already seen the top of this stock market cycle; but if the S&P500 Index fails to climb to a new high soon and instead declines from these levels, we will need to respect the market’s verdict. 

We are aware that in the past stock market cycles; the inversion of the yield curve signaled the onset of a recession/accompanying bear market.  However, over the years, we have also learnt that when it comes to investing, nothing is set in stone and you cannot drive a car by looking in the rear view mirror.  So, we must remain open to the idea that this time around (due to central bank bond market intervention), perhaps we may get a bear market without the inversion of the yield curve.  

In terms of our performance, we are pleased that since inception (1 January 2013), both our equity and fund portfolios have outperformed the MSCI AC World Index. Moreover, on 1 August 2014, we launched our blue-chip portfolio (suitable for long-term ‘buy & hold’ investors) and this strategy is also performing well.

Below is the performance summary of the various strategies (month-end fact sheets are attached):

Net return since inception (1 January 2013)

Equity Portfolio                      Fund Portfolio                        Benchmark (MSCI AC World Index) 

(+) 29.50%                                (+) 28.54%                            (+) 22.65%     

Net return since inception (1 August 2014) 

Blue-Chip Portfolio                Benchmark (MSCI AC World Index)

(+) 3.44%                                (-) 1.42%

Turning to commodities, the recent smash in China’s stock market has ended the counter-trend rally in the CRB Index (as well as copper and crude oil) and a new down leg is now underway.  Given the macro-economic environment, the path of least resistance for this sector is down.

Over in the precious metals patch, the price action remains weak and earlier in the week, silver fell to a 5-year low.  In terms of the mining stocks, as per our expectation, the Gold Bugs Index has crashed below its 2008-low and it is now trading at levels not seen since 2003!

In the currencies arena, the US Dollar has strengthened a tad but its near-term outlook in relation to the Euro is uncertain.  If a Greek deal comes to pass, it is conceivable that the single currency may rally on the news.  In any event, we continue to feel that the US Dollar will probably keep rallying against the Australian Dollar, Canadian Dollar, Japanese Yen, New Zealand Dollar and a host of emerging market currencies.  So, as long as the US Dollar Index stays above the 93 level, our readers should keep their cash in the senior currency.

Finally, over in the debt market, given China’s stock market crash and its economic fallout, we suspect that long dated interest rates in the US may have commenced a topping process and they should not rise much from these levels.  Should economic activity weaken over the following months and inflationary expectations fall further (due to the ongoing rout in commodities), then it is probable that long dated interest rates in the US (and other nations in the developed world) will decline significantly from these levels.  Therefore, in order to hedge their equity positions, our readers can consider allocating some capital to 20-30Year US Treasury Bonds.  

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Puru Saxena is the CEO of Puru Saxena Wealth Management, his Hong Kong based SFC regulated firm which offers discretionary portfolio management and research services to individual and corporate clients. The firm manages two trend-following strategies – Discretionary Equity Portfolio and Discretionary Fund portfolio.  In addition, the firm also manages a Discretionary Blue-chip Portfolio which invests in high-dividend world leading companies. Performance data of these strategies is available from www.purusaxena.com

Puru Saxena also publishes Money Matters, a monthly economic report, which identifies trends and highlights investment opportunities in all major markets.  In addition to the monthly report, subscribers of Money Matters also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

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