In both life and investing, in tough times, it can be hard to hold faith in the future while observing the present. But in the words of Warren Buffett, “Someone is sitting in the shade today only because someone planted a tree a long time ago.” Let us not underestimate the heart and will of the entrepreneurs, investors, bureaucrats, and young people who are planting trees in China today.
I’ve been wondering lately which country—if any—can be the next China. Much of what made China a manufacturing powerhouse didn’t happen overnight; it took generations.
For example, when I was growing up in Taipei, my grandpa took piecework from the local hairbrush factory. I would sit next to him and insert thousands of plastic bristles into wooden handles, one at a time, until we hit his quota. Then he’d return the assembled brushes to the factory and get a new order.
The second quarter saw investors bidding stocks higher, swept up in a ChatGPT-inspired AI frenzy and encouraged by macro data pointing to a stronger-than-expected US economy. Meanwhile, fixed income markets came to terms with the fact that, despite a “hawkish pause” from the Fed in June, the central bank was unlikely to soon declare victory in its battle with inflation—made all too real amidst the heat by a recent Wells Fargo report, showing ice cream prices up 9% since last summer! Below, we highlight themes and data the team at Rayliant has been tracking as we turn our attention to the second half.
My interest in emerging markets is largely driven by my personal experience. My parents participated in the spectacular growth of Taiwan, where they saw their annual income increase exponentially. But not all emerging markets have been so fortunate. Why do some emerging markets “emerge,” while others do not?
A ‘Santa Claus rally’ sent risk assets rallying into the new year, as markets doubted central bankers’ resolve to keep raising rates. Will 2023 bring falling inflation and a soft landing, or disappointment for investors?
Some investors avoid China due to headline risk. But that itself may be the biggest risk of headlines: avoiding China. In this article I explain why.
In our latest Quarterly Asset Class Update, we break down global markets by the numbers, offering thoughts as to where markets could be headed as 2022 heads into the home stretch.
Smart beta products using common factors like value, low volatility, quality, and small cap experienced an underwhelming performance from 2005–2022. On average, long-only factor portfolios built from a wider set of global factors identified in the finance literature generated significantly positive excess returns across countries, suggesting diversifying across many factors is more prudent than selecting a handful that have performed the best.
Many investors say they “don’t invest in China” at all – despite having tens or even hundreds of millions invested in an emerging markets portfolio. These investors would be well-advised to understand the extent to which their EM portfolio is, in fact, invested in China.
Jason is making some predictions…and fully acknowledging that all of them could be wrong. There are only two sustainable options in investing: lose money fast, or compound returns slowly. Diversification remains the only free lunch in investing, and it has always been (and is likely to remain) the best way to successfully weather turbulent markets.
Stagflation fear sent stocks into a bear market in Q2, while bonds tanked as the Fed debated a full-point rate hike after June’s jarring 9.1% rise in US CPI. How might the fight against inflation unfold in the second half?
What will happen if our politicians pursue an economic “hard landing” that weakens employment for below-median households? What if Fed rate hikes crater consumption by further reducing their real income and wealth? If these things happen, we will achieve a Friedman-esque victory against inflation … but an ultimately empty victory for Main Street. At its heart, our current inflation is a political problem. It is going to require a political solution.
The so-called “fear premium”—the alpha opportunity created by fear-driven markets—is well-studied and understood. And yet, few investors have the discipline to avoid the behavioral mistakes caused by fear. Those who do will not only survive, but thrive.
For the past decade, many investors have been living in the Matrix. Buoyed by extensive quantitative easing and overseas production, their portfolios have ballooned. They believe in their illusory world, a place they have the ability to grow wealth unimpeded and without consequence. Unfortunately for them, this is the real world—and inflation is the blue pill.
We are quick to criticize other countries’ regulatory and fiscal missteps, but it would be foolish to imagine the US Federal Reserve and our other institutions are not similarly capable of self-harm. It could be out of ignorance, hubris, or politics. Regardless, the coming stagflation is cause for concern in the US.
Dr. Jason Hsu looks at a unique and recent regulatory push in China (one still not on Western radars) that is an illustration of how US and Chinese regulators are trying to tackle the same problems…but with very different toolkits.
Beijing’s consumer tech crackdown last year led some global investors to hypothesize that China is punishing success. But the likely real reason is simpler: Beijing feels uncomfortable with the power a few firms harness through their unbridled access to personal data. Western regulators are grappling with similar concerns.
March marked ‘lift-off’ for the Fed, which commenced tightening, hiking rates a quarter-point. With Russia’s invasion of Ukraine shocking energy markets and COVID shutting down Shanghai, is a soft landing at risk?
Beijing’s consumer tech crackdown last year led some global investors to hypothesize that China is punishing success. But the likely real reason is simpler: Beijing feels uncomfortable with the power a few firms harness through their unbridled access to personal data. Western regulators are grappling with similar concerns.
This piece was originally penned to address concerns over how the invasion of Ukraine might exacerbate a potential conflict between China and Taiwan. For those asking my opinion, I predict China will deescalate with Taiwan in the coming years because it simply has too much to lose by invading—and too much to gain through patience.
Red-hot inflation going into 2022 has pulled forward the Fed’s timetable for tightening, just as a surge in Omicron cases threatens to hit growth. How will markets react to rate hikes in the year ahead?
There is one piece of asset allocation advice we’ve been giving over and over again since Rayliant launched: The onshore China A shares are a better place to be than the ADRs and Hong Kong listings trading offshore.
There are 136 firms that dual-list in the mainland China A-share market and the Hong Kong H-share market. Of these, 135 are more expensive in mainland China. This article explains why this price discrepancy exists and how investors can take advantage of it.
Shipping bottlenecks and strained supply chains contributed to a spike in prices during Q3. Will hawkish central bankers end the party for stock and bond investors, or might such fears turn out to be ‘transitory’, as well?
Contrary to many pundits’ predictions, Jason Hsu is confident that Beijing’s deleveraging efforts will avoid a housing crash in China. The much bigger issue, from both a social welfare and economic perspective, is housing affordability—a crisis he’s seen firsthand during his recent stay in China. This article explains more.
Headlines in the West have been implying Evergrande’s predicted collapse could cripple Chinese banks and create a run on financial institutions. Rayliant Chairman and CIO Jason Hsu explains why differences in China’s real estate development financing make this very unlikely.
Beijing’s announcement of a 3rd new stock exchange may have been surprising, but actually makes sense when viewing from a local perspective.
Philanthropy, taxes, and government assistance programs are new concepts that are top of mind for the Chinese government, signaling a willingness to adopt a more Western approach towards achieving common prosperity.
China’s regulators are focused on those industries and companies with the greatest potential to hurt Chinese society. This means ESG investors who tailor their approach to local social issues —which are often different from “western issues”—can avoid regulatory black swan events and earn better returns.
Recent market activity suggests that A-shares have less regulatory risk than H-shares and ADRs.
The latest policy decree from Beijing is a likely death sentence for the for-profit education sector in China … but it may be a win for Chinese society. Global investors are sometimes uncomfortable with China’s interventionist approach to address social issues. But if they want to invest successfully in Chinese companies, they’d better understand it.
Global economic rebound from the pandemic sent stocks, bonds, and commodities soaring in the second quarter. Could a big jump in prices and the prospect of rising rates put a year-long rally at risk?
Is this the end of the road for Chinese ADRs? China may be tightening the VIE loophole that previously permitted U.S. listings of Chinese companies. This article explains why ADRs and VIEs present an especially complicated issue for regulators in China.
Much has happened this week in the Chinese tech and ADR space. Here are my thoughts in response to some of the questions I’ve been receiving from investors and others.
I’ve been getting questions about the Ant Financial IPO, and it was validating to see Charlie Munger’s recent interview on the topic. The brief article below shares my thoughts on the topic, and on China’s regulatory approach more generally.
Jason Hsu and I have been monitoring the unprecedented rush of Chinese companies to list on U.S. exchanges. Our key takeaway? Many of the highest-quality Chinese firms are and will continue to be listed exclusively in mainland China.
Vaccine rollouts and improving sentiment have prompted market rotation to start the year. With stretched stock valuations, turbulent bond markets, and flashes of inflation, how will reopening and recovery play out?
Given some of the alarmist coverage around the slowing loan activity in China, it’s no surprise that investors are curious. The change in policy will likely have an effect on the Chinese equities market, but the impact may be different than many suspect.
In this research note, Dr. Phil Wool reviews some of the history behind China’s asset management industry. The results shed light on the sources of mutual fund outperformance in China and demonstrate the value of active management in a market dominated by retail investors.
Most people prefer to understand Chinese regulators through the lens of communism vs. capitalism or a one-party system versus a multi-party democracy. However the more useful (and certainly the most simple) analogy is likely the “tiger-mom” vs. Montessori framework for parenting.
In 2020, a black swan disrupted the global economy, pushed macroeconomic policy to extremes, and spurred a growth rally that saw amateur investors handily beating the pros. How do markets sit as we enter a new year?
Last November, the Trump administration announced a ban on US investors holding Chinese stocks with suspected military links. Despite some big names falling on the US government’s blacklist, the contribution from banned stocks total less than 3% of the overall weight in the average China investor’s portfolio.
The value-growth cycle is a hot debate of late. As it should be. So is talk of bubbles. Research Affiliates co-founder Rob Arnott continues to sagely prophesize value’s return. Here’s Rayliant’s take on where we are in that cycle with respect to the China equities market. We also contrast it with the journey that the US stock market has been on over the last 10 years.
While drama makes for good TV, there may be too much of it around the recent slate of SOE defaults. While attention is warranted, a broader perspective may point to a positive development versus something to trigger alarm.
As we hurtle through the final quarter of a very strange year, how are surging cases of COVID-19, rising political uncertainty, and major shifts in economic policy impacting investors and markets?
Despite the staggering size and growth of China’s economy, Chinese stocks occupy a surprisingly small place in most investors’ portfolios. Dr. Phil Wool takes an evidence-based look at common arguments for and against a greater allocation to the world’s second-largest stock market.
As growth stocks in China continue an extraordinary run, we examine data on the A shares rally in the form of eight charts to answer the question: Is there a bubble in China’s market?
Markets have staged a remarkable recovery since their March lows. Now all eyes are on the global economy to catch up. With the virus under control and borders reopened last month, Europe should see economic activity pick up.
What will the post COVID-19 world look like? Pre-pandemic trends combined with large fiscal stimuli, increasing efficiency by working from home and many other factors will shape what changes lie ahead.
In this Q&A, Phillip Wool explains how local fundamental insights work to enhance the standard quant investing approach.
The US-China trade war, low interest rates, taxing US tech giants… Read all about it in our newly released quarterly commentary – including how the year-end snowy heights came straight at equity investors in a truly monster Santa Rally.
Not all investors are immune to fears caused by the coronavirus, and the market’s reaction need not be rational. Our CIO Jason Hsu and Head of Investment Solutions Phillip Wool share their analysis on Chinese stocks’ response in the initial weeks of the outbreak.
The experience of some of the most efficient investors in China’s A shares lends a view into unlocking alpha in one of the world’s most inefficient markets.
Brexit, HK, Middle East, Trade Wars: Markets are being better behaved than the politicians.
Even before the recent trade war, the U.S. president had a hand in China’s market, by way of “concept” stocks. They are just one of the quirks found in retail heavy emerging markets like China, whose inefficiencies—and alpha opportunity—are traced to non-professionals trading as much for entertainment as for profit. In the research below, we investigate the evolution of retail participation in China A shares, the remarkable inefficiencies that creates, and the implications for professional investors.
In this Q&A, Phillip Wool walks us through the world of factors and highlights the benefits of a multi-factor approach.
More than the weather is heating up. The EU’s threat to Swiss independence makes China’s view on Hong Kong look benign, while Iran’s militarized response to US pressure and the US-China Trade War are moving even Brexit off the front page. The US bull market is now at an all-time high.
The Fed Chair, Jerome Powell, was expected to be more pragmatic than his predecessors Janet Yellen and Ben Bernanke. He was leading the way by delivering four rate hikes in his eleven-month tenure. Enter the December 2018 sell-off.
In this Q&A, Phillip Wool talks about the challenges of EM investing and how a localized, systematic approach can help to unlock a rich source of sustainable alpha.
ESG investing has become more in vogue in the past five years. Part of this may be driven by an on-faith belief, supported by shallow anecdotal evidence, that investing in ethical companies (high ESG companies) must lead to better investment outcome. You could call this belief the “good karma” principal in investing.
Human beings are wired the same way wherever they come from, and that means they’re likely to make the same mistakes when it comes to trading stocks.
Factor returns are often reported as the average of factor returns among large stocks and the factor returns among small stocks. However, factor returns among small, illiquid stocks are significantly higher than those among larger, more liquid stocks, suggesting that the factor returns in the literature are exaggerated and cannot be implemented with substantial assets.
To maximize social value and investor returns, it is optimal to fund those ESG firms that are most in need of capital.
Already the world’s second-largest economy, China is expected to pass the U.S. as the number one within ten years. Just how does that extraordinary growth translate into an opportunity for equity investors?
Emerging markets equity beta provides investors with a welcome source of portfolio diversification. But inefficient markets dominated by heavy retail trading also present a compelling alpha opportunity for portfolios tailored to the nuances of EM.
China’s state-owned enterprises (SOEs) and private listed companies differ in profit motives and capital access, posing a challenge to investors. Combining a quant approach to managing SOE exposure with fundamental insights offers a more compelling solution.
Some investors shy away from the emerging markets, put off by hazy accounting and financial reporting. Quantitative tools help cut through the fog, avoiding the pitfalls of misleading data and capturing opportunities not recognized by the market.
Find out which factors strategies have worked and which have not over the last two decades since the opening of China’s stock markets.
Investment manager selection methodology commonly employed by industry practitioners turns out, in fact, to be a detriment to performance.
When smart beta ETFs are actively traded, mutual fund flows become “smarter”, with a higher sensitivity to alphas from multi-factor models.
