- Negative Chinese credit impulse – given its significant impact on Chinese growth and base-metal prices – would probably be good news for DM equity (vs EM equity), base-metal importing countries (vs exporters) and DM non-commodity corporate credit.
This blog post has been partially inspired Trilogy Global Advisors: https://www.trilogyadvisors.com/1066040.pdf
I foresaw the negative Chinese credit impulse in November 2016 when Xi sent a very clear signal of credit tightening and regulatory clampdown on the financial industry. That let to my prediction of underperformance of Chinese A shares (vs other EMs) and less bullish outlook on Chinese overseas shares. Looking back at the 1H 2017, however, I have been wrong on three things:
- The EM equity rally has lasted longer than I thought – I was a bit too early closing the positive call on EMs.
- Base metal prices have held up better than I thought – they were flat in 1H 2017 as opposed to a decline.
- There was an argument that the negative Chinese credit impulse creates deflationary forces on the globe, contributing to lower bond yields in 1H 2017 – which I didn’t fully think about.
In retrospect, the market performance again proves the (near) impossibility of market timing, i.e. timing the peaks and troughs of any market.
However, my argument on negative credit impulse end of last year still holds in relative terms:
- Base metal price underperformed equity
- Raw material equity underperformed aggregate equity
- Chinese financial sector stocks (banks and property) underperformed EM equity, both in A-share and overseas markets
Looking forward, what would be the implications of negative Chinese credit impulse? Assuming no systemic crisis (e.g. sudden devaluation of CNY) that would send risky assets sharply down,
- Base metals should underperform energy
- base metal-importing markets should outperform exporting markets – opportunity arise in certain DMs; good news for Europe.
- Within EMs, India and Turkey may continue to outperform EM aggregate.
- Given the base effect of commodity price in inflation, ECB, BoJ and BoE still need to maintain a dovish tone despite talks of balance sheet reduction: opportunity in DM non-commodity investment grade credit.