Asia has underperformed the US equity market over the last five years, even with the Chinese stock market doubling in the last year. This trend may be changing, according to Louis-Vincent Gave, CEO of GaveKal Research in Hong Kong. Louis sees a massive reweighting toward Chinese assets, as well as potential major changes for the Chinese currency, the Renminbi (RMB), when the IMF decides whether or not to add the RMB to its basket of global reserve currencies in November. Louis also discuss the implications for negative interest rates in global bond markets, as well as his views on gold from an Asian perspective. They also discuss US equity market valuations, and what could drive the market higher
Here is a partial transcript of his recent interview airing on the Newshour Podcast page and on our iTunes page this Friday.
Louis Gave: “I was recently in your neck of the woods in San Diego giving a speech at the Mauldin Conference and my startup line was that I said, ‘Look, all of you in this room are part of the biggest crowded trade there is. And the biggest crowded trade is that none of you own China and the reason it's a crowded trade is that it's about to change.’
The single most important macro-factor today is China opening up its capital accounts and making the renminbi more freely tradable. This is important because it means that over the next few years, China, which is for all intents and purposes completely absent of any international global equity or bond index, will move to be 5, 10, maybe 15 or 20% of global equity and global bond indices leaving pretty much anyone benchmarked against any kind of global index scrambling to keep up with this reweighting.
For me, this is the single most important thing happening today. The fact that the renminbi is slowly but surely becoming the fifth largest currency in the world means that our global financial architecture is changing and most people's portfolios don't reflect that new reality…
Simply put, I'd buy China for a couple of reasons. First, when it comes to investing in China, and I know this going to sound corny, but so much depends on dates. And there's a very important date coming up for China, which is the November IMF decision on whether the RMB becomes a special drawing rights currency or not.
Before this November decision China will do everything it can to prevent a financial market accident; it will do everything it can to prevent a RMB devaluation; it will do everything it can to prevent a bond market accident; and it will continue to be doing what it's been doing for the past 9 months, which is each time the equity market is down 5% or more over the course of a week, they come out over the weekend and announce something to crank it back up, whether an interest rate cut, a reserve ratio requirement cut, more financial deregulation...etc.
So between now and November you have a government that is underwriting stable and rising markets: currency, bonds, and equities. And it's a government that has $4 trillion in reserves. So if they can--they can't keep the market up forever, nobody can--but they can definitely keep it up for 6 months if they so wish partly because they have a lot of monetary policy room…and of course because they have this huge war chest.
So that's the view for the next 6 months. After that, a lot depends of course on how the IMF decision goes and how China responds to that. But assuming that the IMF decision is positive, I think this will open up the door for a lot more central bank purchases of Chinese fixed income, which will lead to a much lower interest rate in China and from there you'll start to see all the big bond and equity benchmark providers...start to re-weight China into their benchmarks and this will lead to a tidal wave of flows into China because, let's face it, nobody owns China today apart from Chinese retail investors and, even then, very few Chinese retail investors own it. Out of a population of 1.3 billion, it's likely that only about 80-100 people own equities.”
In the rest of this interview, Louis-Vincent Gave also discusses his outlook on gold, commodities, and the US stock market.
To listen to the entire interview, please log in and visit our Newshour Podcast page or click here to subscribe.
