YWR: Surprise Market for 2024
Disclosure: These are personal views and market commentary only. Not investment recommendations. For that seek professional help!
30 minutes to my first meeting.
I really should go back to my room and prepare some questions.
Or, I could have another coffee and read the paper.
It’s one of my work trip indulgences. Have a big buffet breakfast, then sit back, spread the paper across the whole table and read the local news. You learn things you would never realise back in your office. Sure, all the news is there on the internet, but sitting in a different country, reading the paper every morning for several days, you always learn something, or realise something new. That realisation is often not what you expect.
It was Jan ‘09, in Beijing. And cold. I was here for Deutsche’s China conference. It was cold outside, but I didn’t leave the hotel much. The conference was at the Hyatt near Tiananmen.
The reason for the trip was that I needed some ideas for my short book. The US had been a wipeout last year, but China had held up better. Investors were still clinging to the view that China had ‘structural growth’ and would be somewhat immune from the financial crisis in the US. My idea was that there was opportunity to short China stocks as the next wave of global recession finally hit them. US consumers were unemployed and foreclosing on their homes. Surely, that would be problem for a country dependent on exporting to the US. I wanted to meet some Chinese companies and figure out the best way to play it.
As I started another coffee and scanned the papers, what stood out were these continual headlines about provinces and their 2009 growth targets. The headlines had been similar the day before.
Each province was one by one coming out with their 2009 growth projections. China’s economy had been slowing throughout ‘08 and with the start of the new year the Chinese provinces were all making bold declarations of 9% GDP growth for 2009. Or, 9% within +/- 0.1%.
“Guangdong promises to deliver 8.9% growth this year!”
So ridiculous. Like a bunch of Girl Scouts declaring how many cookie boxes they will sell. The economy is a wild and unpredictable beast. Don’t they know that? You can’t predict it to 0.1% precision. Especially in 2009.
Don’t these provincial Governors realise what is about to hit them?
The Global Financial crisis was a tsunami rolling across the Pacific heading towards China and these Governors were naively predicting 9% growth. Wow. What a great short opportunity.
Man I’m so freakin bearish!!! I feel like a massive Grizzly Bear!!! Aaaarrrrr!!!!!!
Get me a borrwow!!! I’m going to short the snot out of everything!!!
Now I just need to do these meetings and figure out which names to short.
So I did the meetings. Met with banks, property companies, and insurers. The CEO’s were relatively optimistic about the future, talking about all the reasons China would still grow, but I wasn’t listening. My mind was set. These CEO’s were the same as the US ones in ‘07. Just clueless. Stupid Chinese CEO’s had no idea what was about to unfold.
Stupid me.
There was huge opportunity all around me, but I didn’t see it. And the key was those morning papers.
It turns out that in a highly controlled economy you actually can hit an artificial growth target if you really try.
Surprise, surprise. In 2009 China boomed. The stock market boomed too. The SSE was +62%. Turns out all those companies were massive buys.
What’s the key takeaway? Stupid question.
The key takeaway was when China wants to grow it can.
And why do I bring this up today?
Because it’s happening again.
China is on the ropes and the provinces are again under pressure to deliver growth. In 2024 the number is 5.5%, not 9%, but it’s still a great # and higher than the 4.8% economists expect. Also much higher than what the market is pricing in.
So what’s the set up?
Chinese provinces pulling every lever to deliver a big year.
Chinese stocks -55% from the highs, while the PBOC is ramping up QE.
PBOC Balance Sheet (Blue), FTSE China (Red).
The Chinese consumer is delevered and sitting on record amounts of liquid deposits.
Chinese scientists are leading the world in innovation. Patents are through the roof.
Chinese companies have the 2nd best earnings growth expectations for 2024.
Chinese equities have the highest expected return from current levels.
All this and Chinese stocks are trading at the lowest valuations in the world. Absolute and relative.
It’s why China is the YWR suprise market for 2024.
Japan was the Surprise Market for 2023.
If this call is right, Chinese stocks rocket, but it has implications for many other sectors as well: EM/Value/Cyclicals.
Here’s how I’m playing it.