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China Still Draws Some Investors, Charlie Munger’s Legacy, and a Look at the FX Markets.

Author: Marco Santanche

Hedge funds still drawn to China

Although outflows are ramping up this year, some of the most important quant hedge funds, including Paris-based Metori and London-based Aspect, are looking into increasing their exposure to the major Asian economy.

The main potential attractiveness of investing in the country is perhaps the opportunity to be less correlated to US equities, compared with many of the developed and emerging markets. The Chinese economy has been growing rapidly over the past few years, and the country's GDP ranks second in the world's biggest economies data published by World Data.

Moreover, the number of foreign investors has increased over time, and the Shanghai stock market could perhaps have the highest potential of any in the major economies. Most of the investors remain local, and the change in development plans from the government might further boost the economy in the upcoming years, especially if paired with the strong consumer confidence that has characterized recent times.

However, this year has been negative for the stock market so far. While most economies have recovered from the difficult inflation challenge last year, the Chinese market has struggled, with the Shanghai Composite Index losing -3.04% as of November 29 (source: Yahoo Finance). The unresponsive policy relating to the crisis in the real estate sector is a source of worry for all stakeholders as well. In addition, tensions with the US and Taiwan constitute risk factors that cannot be ignored.

Nevertheless, long term the market could remain attractive. With an advancing technological sector and prosperous energy industry, which is also heavily invested in renewable resources, several international companies are looking at Shanghai as a geographic, strategic location for new offices. China-focused ETFs and funds are also growing in number, and since their assets have been flowing out this year, there could be an even bigger opportunity for those who stay to profit, and for new investors to enter at the right time.

New opportunities currently include the development of futures and options contracts on local commodities such as soybeans, and the improved regulatory framework, which brings additional confidence in the further development of the market and economy as a whole.

Charlie Munger's legacy

Famous Berkshire Hathaway vice chairman Charlie Munger has passed away at 99, after a brilliant and successful investment career at the side of Warren Buffet. His lifelong partner once described him as "the best 30-second mind in the world", capable of fast and multifaceted thinking, empowering his company with a thorough understanding of any situation under exam.

The constant sparring with Buffett on investment strategies and decisions led Berkshire Hathaway to the greatness it is today known for. His approach has always been fast and insightful, according to the Oracle of Omaha, leading to an opposite, yet complementary view of the business world to that of Buffett, which is more thoughtful and oriented towards building up solid businesses from mediocre ones.

Munger had an elementary worldly wisdom that was about value investment at its core, and was perhaps even a proper philosophical discipline. It helped him in keeping emotions out of the investments in order to avoid rushed or approximate decision making, increasing the number of correct decisions (or, at least, ensuring that each action and its possible outcomes were properly analyzed). This aspect has something in common with quantitative finance and the research effort it needs.

It is also a well known fact that he preferred to invest in a few stocks - similar to the way in which Buffett and Berkshire Hathaway invest. The number of companies should be limited in order to better consider their pros and cons, and to reduce the amount of information one needs to constantly monitor. In his opinion, probably mathematically based, 10 stocks is already an over-diversification of risk.

To reduce the number of companies to look at, he started by eliminating bad or mediocre ones. One of his phrases was: "It's remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

Finally, the most remarkable aspect of his investment style is - similarly to Buffett - the 'buy and hold' approach. "Big money is not in the buying and selling, but in the waiting," according to Munger. Compounding will do most of the work, and good ideas are not as common as one hopes they are. And investors like Munger are uncommon as well.

FX: inflation cooldown and dovish sentiment

This week's macro news worked as a tailwind for the FX markets. The dovish expectations on the Fed rate policy pushed the dollar higher, while the euro and Aussie slipped after improved local inflation data, including a lower-than-expected CPI from Germany.

The New Zealand dollar moved up after the Reserve Bank of New Zealand paused its hikes, but a warning about further tightening followed. The Japanese yen rose, probably boosted by the fall in US yields (for the first time since September).
The British pound moved higher against the dollar, following the recent fiscal-policy bolstering, improved consumer confidence, and a recent sell-off in gilts that pushed bond yields higher.

For US bonds, the yield curve steepened strongly after Fed governor Christopher Waller, considered a very hawkish member, made dovish comments. The two-year rate was at 4.73% on Wednesday (-0.11% on the day), the five-year at 4.29% (-0.09%) and the ten-year at 4.34% (-0.05%).

On a side note, Amundi, one of the largest European funds, has invested heavily in the Turkish lira. In particular, their underweight is slowly decreasing, given last week's decision of the Central Bank of the Republic of Türkiye to hike their policy rate by 40%, in order to fight inflation (currently at about 60%). The struggle for local households is real, and the move is bold but necessary, and in contrast with the steps previously taken by President Recep Tayyip Erdoğan, who was convinced of his interest-rate cut decisions to reduce inflation. This could be related to his re-election in May.

In Russia, the central bank is resuming interventions to support the ruble starting from January, with the intention of adjusting their formula to improve the effectiveness of their actions.

This content is for educational purposes only and is NOT financial advice. Before acting on any information you must consult with your financial advisor.