Juggling Dynamite

Pu Yonghao, regional chief investment officer for Asia Pacific at UBS Wealth Management in Hong Kong, talks about China’s economy, government policies, and his investment strategy.Here is a direct link.

This clip is a beauty. First of all the long-always UBS equity manager explains how he has been spreading money around in different coloured jelly beans and hoping for the best over the past couple of years (as always)…and lately he has been increasing his fund’s allocation to US stocks (now at cycle highs) by moving some capital out of places like Chinese stocks (now back near cycle lows–so sell low, buy high–)…but the real money shot starts at 2:26 when the female host asks if he has ever been underweight Chinese stocks (since they are down 8% ytd, 27% over the past 2 years, 63% over the past 6 years) and Mr. Yonghao explains that they had been overweight China (through those declines) until 2 months ago when they decided to go “neutral” which means still holdings stocks there but in a lower amount. It is refreshing though to hear him admit (at 3:43) something that the US Fed and its fans have yet to do: that having pumped its capital brains out trying to force an economic rebound the past 4 years, now “China [and other Central Banks] cannot afford more monetary stimulus” even as corporate margins and export demand are rolling over hard once more. Oh well, better luck next cycle…

The US dollar consolidated some gains last week, but year to date the greenback has been climbing against nearly every major currency in the world. Since commodities like oil are priced in U$, the climbing dollar translates into increased cost pressure on many of the world’s already struggling economies. This morning the Indian Rupee(INR) hit an all time record low against the U$. The 10th largest economy by nominal GDP and the 3rd largest by purchasing power parity (PPP), India like most countries has been facing significantly slower growth and demand since the global credit bubble burst.

A weakening Rupee helps to make Indian exports cheaper, but for a country that imports 80% of its oil, the retreat of the Rupee also leaves less room for monetary easing as inflationary pressures build amid weak domestic fundamentals. (Same negative cost effect for Japan on weaker Yen: see video report here).

Furthermore, the US Fed’s Quantitative Easing has driven speculative money flows into most emerging economies, markets and currencies over the past 3 years, and the inevitable ‘tapering’ or dreaded reverse of those flows poses a significant price risk to Indian capital markets which have been weakening now since 2011. See: Rupee’s slide to record drags down bonds, most Indian stocks.

Zhu Haibin, Chief China Economist and Head of Greater China Economic Research at J.P. Morgan says monetary easing may not be effective to address the structural problems facing China’s economy at this moment. Here is a direct video link.