Market Sea-Change Underway As Asia Repatriates Capital From The West | Louis Gave
While much of Wall Street's focus over past recent years has been on the Big US Tech stocks, aka the Magnificent 7, there are an increasing number of seismic developments happening internationally investors need to be aware of.
For example, emerging market stocks have positively trounced tech stocks since June.
And to name just a few others:
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China is now firing it's monetary and fiscal bazookas with gusto.
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India is now the world's fastest growing major economy & its stock market is booming.
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Japan just elected a new prime minister whose hawkish policies might end the yen/dollar carry trade.
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And of course, the escalation of hostilities in the MidEast threaten to inject a lot more uncertainty into geopolitical and global trade.
Which international trends are the most important for investors to track?
What are the biggest risks? And where are the biggest opportunities?
To better understand the situation from a non-US perspective, we're fortunate to welcome back to the program Louis Gave, Founding Partner and CEO at Gavekal.
He observes there's a sea-change underway in markets as Asian investors repatriate capital from the West, which is upending the dynamics of the current market rally.
Here are my key takeaways from the interview:
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Both the US and China are expected to implement fiscal and monetary easing policies in 2024, with the US likely initiating more fiscal spending post-2024 elections, irrespective of whether Trump or Harris wins. The US Federal Reserve is also anticipated to continue its rate cuts. The combined liquidity boost from the world’s two largest economies is expected to create a conducive environment for global asset price growth. The ECB (European Central Bank) has also cut rates, signaling a broader international trend towards policy easing, which typically supports financial markets, particularly equities and commodities.
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China has implemented a major stimulus package, injecting 2 trillion Renminbi ($280 billion USD) into its economy. This unprecedented move is akin to Mario Draghi's 2012 “whatever it takes” moment for the Eurozone, aimed at revitalizing the market's confidence. Despite running monthly trade surpluses of around $80 billion, the largest in its history, China's growth has been stymied by a lack of domestic and international investor confidence. The new stimulus is expected to drive a significant capital inflow back into Chinese assets, triggering broader gains in emerging markets that are closely tied to China’s economic performance.
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Rising geopolitical risks in the Middle East, especially the escalation of conflicts involving Israel, have increased the potential for a spike in energy prices. The US Strategic Petroleum Reserve (SPR) is at a record low, and there are high short positions on oil, which could amplify price volatility if the situation worsens. Any significant disruption in oil supply could lead to a rapid increase in energy prices, triggering an inflationary spike that would undermine global growth prospects and complicate monetary policy decisions.
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The narrative around Chinese and other emerging market stocks has shifted dramatically from "Anything But China" (ABC) to "All-in Buy China" (ABC). Chinese stocks have started outperforming US equities for the first time in several years, and the Chinese government bond market has also outperformed US Treasuries year-to-date. This performance is not isolated, other emerging markets like Brazil, Chile, and Indonesia are also rallying. These markets, traditionally viewed as “uninvestable” by some, are now attracting capital due to
their discounted valuations and positive momentum. For instance, Brazil’s market remains deeply undervalued, while Indonesia and the Philippines are benefiting from favorable demographic trends and increased foreign investment.
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There is a growing trend of capital moving from the West back to the East. Japanese investors, traditionally large buyers of European and US bonds, are now beginning to repatriate capital. This trend is expected to accelerate if Japanese assets start delivering better returns. Similarly, Chinese investors, who have kept significant amounts of capital abroad due to confidence issues, may begin repatriating funds. This shift could weaken Western equity markets, especially those reliant on international capital, while boosting Eastern markets.
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Japan recently elected a new Prime Minister known for his hawkish stance on monetary, fiscal, and international relations policies. This leadership change could mark the end of the yen-dollar carry trade, a strategy where global investors borrow in yen at low interest rates to invest in higher-yielding assets elsewhere. The yen has appreciated significantly, around 4 points since the Prime Minister's announcement and is still undervalued, suggesting further appreciation. A stronger yen could lead to higher import costs for Japan’s competitors, boosting global reflationary trends and impacting everything from technology supply chains to automotive markets.
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France, now the largest bond issuer in Europe, faces a rapidly deteriorating fiscal situation. Its 5-year bond yields have surpassed those of Greece, raising concerns about the sustainability of its debt. French national debt has ballooned to three times the total debt of the entire African continent, despite having a population of only 67 million compared to Africa’s 1.3 billion. A fiscal crisis in France could trigger broader European instability, especially since Japanese investors, large holders of European debt, might accelerate capital repatriation if bond spreads widen further. Such a crisis could lead to massive capital destruction, creating ripple effects across global bond markets and potentially destabilizing the European financial system akin to the Eurozone crisis of 2011-2012.
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Louis suggests the market’s recent shift could reflect pent-up hiring and investment being unleashed after election uncertainties clear. While he acknowledges concerns about a hard landing, he advises against going against both policy and market trends simultaneously, as it’s risky to bet against both when they’re aligned in a different direction.
For the full interview with Louis Gave, watch the video below:
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