The China Pivot: This Time Is Different

Ox Capital (Fidante Partners)

October 2024

Ox Capital has always believed  the "perceived" structural problems in China are well discounted by the cheap valuations of Chinese stocks. Furthermore, the underlying issues are less severe than commonly believed for a few reasons.

1. Ageing Demographics and GDP: China's GDP growth has driven productivity growth not population growth. GDP per capita is only USD12,600, far below that of developed economies. GDP per capita growth will continue as the country develops.  
2. Property sector weakness: The bulk of the property market adjustment has already taken place. The authorities are finally putting a line in the sand by aiming to "achieve no further price declines and stabilise property prices".
3. Regulatory crackdowns for private businesses: With the authorities' focus on economic growth, heavy handed regulatory pressure on the private sector has peaked.
4. US-China Competition: This will persist. Unfortunately, the HK market was caught in the middle. With some international capital having departed, the HK market was severely discounted. In response, regulators in HK and China are planning to channel Mainland capital to invest in the HK market. Furthermore, following recent news of economic stimulus, foreign funds have already started to return.

At Ox, we believe this time is different. The authorities are addressing the important issues.

1. Deflation: Weak asset prices have been a main drag for the economy. The ex-Governor of the People's Bank of China (PBOC) publicly urged strong policies to fight deflation.
2. The Stock Market: The authorities showed clear intention to support the stock market. The PBOC is going to allow non-bank financial companies, such as insurers, asset managers and brokers to swap their bonds for cash to invest in the stock market. The initial facility is RMB500bn in size and offered more if needed. From our perspective, this is significant, as it means the PBOC is going to use its balance sheet to support stock prices! Furthermore, there are plans to set up special financing channels for public companies for buybacks, and PBOC is open to setting up a stock stabilization fund.
3. The Property Market: The aim is to stabilise the property market which implies a higher tolerance for property price appreciation. These new stabilisation measures include mortgage rate cuts, down payment requirement cut to 15% for first and second properties, financing for local governments to buy back inventories in the market, and banking support for whitelisted developers.
4. Injection of capital into the banks: This will enable the banks to more readily lend.

In addition, there are more policies being considered.

1. Local Government Financing: The Central Government plans to take over some of the debts from the local governments. More importantly, the Central Government is considering tax reforms e.g.  allowing local taxes to be collected by the local governments. These new measures will improve local government's fiscal positions, which has suffered from weak land sales.
2. Consumption Stimulus: Direct stimulus to provide incentives for consumption and lifting income tax tax-free threshold to boost disposable income.

While China has some structural issues, not unlike most other major economies, we have always believed that the key drag to the HK/China share market was a lack of willingness to sufficiently relax policies to tackle the deflationary impulse resulted from property market adjustment. It appears that the direction and magnitude of these new measures can potentially address these challenges.

The stock market related measures have the potential to re-invigorate the market and so far the impact is encouraging with share market trading volume in both the Mainland and HK surging with rising stock prices. The property market relaxation policies should stabilise prices.

If the authorities follow up by tackling some of the longer-term issues, such as local government finances and income distribution (via taxes and direct transfers), this can improve the fiscal sustainability, defuse risks for the economy and boost end consumption demand.

This pivot from the authorities can ignite the long-awaited Chinese economy reflation. Given the extremely attractive valuations, upside from here can be highly rewarding.

Funds operated by this manager:

Ox Capital Dynamic Emerging Markets Fund

Important Information: This material has been prepared by Ox Capital Management Pty Ltd (Ox Cap) (ABN 60 648 887 914) Ox Cap is the holder of an Australian financial services license AFSL 533828 and is regulated under the laws of Australia. This document does not relate to any financial or investment product or service and does not constitute or form part of any offer to sell, or any solicitation of any offer to subscribe or interests and the information provided is intended to be general in nature only. This should not form the basis of, or be relied upon for the purpose of, any investment decision. This document is not available to retail investors as defined under local laws. This document has been prepared without taking into account any person's objectives, financial situation or needs. Any person receiving the information in this document should consider the appropriaten

Market Commentary - September

Glenmore Asset Management

October 2024

Funds operated by this manager:

Glenmore Australian Equities Fund

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Chris Gosselin, CEO of FundMonitors.com, speaks with Benjamin Harrison, Chief Investment Officer at Altor Capital. 

The Altor AltFi Income Fund has a track record of 6 years and 5 months and has outperformed the RBA Cash Rate + 5% benchmark since inception in April 2018, providing investors with an annualised return of 11.68% compared with the benchmark's return of 6.67% over the same period.

Funds operated by this manager: Altor AltFi Income Fund, Altor Emerging Growth Fund

Hedge Clippings | 11 October 2024

November 5th is shaping up as an important date, not only in the local calendar, but globally as well, when Americans finally go to the polls. While all the focus has been on the race for the White House, elections for both the Senate and the House of Representatives take place on the same day. Given the rancorous state of US politics, whoever ends up in the White House may not enjoy a smooth administration if they don't control both houses of Congress as well. And whichever candidate wins the Oval Office, there's a strong chance they won't control the other two houses.

As for the Presidency, it seems it's still neck and neck, and either candidate's to lose. Given the precarious and uncertain nature of world politics, that's just another level of uncertainty. If nothing else, Trump - if he makes it - is likely to be predictably unpredictable. Harris meanwhile seems likely to be more predictable, but unproven. Maybe given that choice, it is no wonder it's an even money race?

Also on November 5th the RBA announces the result of its two day meeting, and with it the outside chance of a rate cut. All the indications are that they won't budge from their current determination to be "resolute" in fighting inflation, while maintaining full employment. However, the RBA will have plenty of new data to work on, as prior to their meeting the ABS is due to release a slew of statistics, including Labour Force (24/10), Payroll (24/10), GDP (25/10), CPI (30/10), Retails Trade (31/10) and finally PPI (1/11). A rate cut, while unlikely at this stage, is not out of the question if the numbers fall the right (or should that be wrong) way.

Of course, November 5th also happens to be the first Tuesday in November when a certain horse race takes the nation's attention. Take your pick where to focus, but at least you'll have 30 minutes after the RBA's announcement to get your cup bets on, and a good 12 to 24 hours (at least) until there's a result in the USA.

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