Some Chinese Food for Thought

The worst performance of the year award goes to… China! China’s domestic A-shares were the world’s biggest loser in 2018.

We had fortunately reduced our exposure to China after the last run-up. We now are analyzing the situation and considering putting more chips back on the table, so to speak. Let us explain why:

For 2018, the Shanghai composite index (SSE) fell 24% while Shenzhen (SZSE) lost 32%, hit finally by the government-induced liquidity squeeze aimed at gaining control of “shadow banking,” along with a natural slowing of the rate of growth, and of course the nascent trade war. Liquidity was drained from the market depriving private firms of some funding. This helped cause bond defaults and spooked business owners who used shares as collateral.

Current China policy has skirted the line between being prudent for the long-term overall good, while using some stimulus for the short-term effects to try to shoot some caffeine into the economic veins.

We do believe that a compromise on trade will be reached, from reports in the press and from conversations we have had directly with people “in the room.” China is disproportionately dependent upon the US, especially relative to our meager dependence upon them for trade. They also have far fewer options when it comes to retaliatory behavior, and cannot possibly keep up in a war of attrition.

No matter the edge one side may or may not have, it is undoubtedly in both countries’ economic best interest to make a deal. One side needs it more, and the other side seemingly just likes to make deals(!). Who knew that one day the subject usually dominated by talk of John Maynard Keynes vs. Milton Friedman would suddenly add Monty Hall to the mix.

Even with the recent pullback in US equities, shares are at very high valuations, finishing 2018 trading at 22.4x trailing earnings (S&, particularly compared with Chinese shares, which finished 2018 with a trailing P/E ratio of 12.2x (  

Should the government become a bit more full-throated in their support of the economy, specifically in easing and increasing the credit supply, we would move into strong bull territory.