Why China may be at a market inflection point

Anthony Srom: I think in terms of China, it’s at a interesting inflection point. If you look at it again from a macro perspective, the 10 year bond yield has stopped falling a while ago. So that’s just a signal that, you know, you should pay attention to. So for example, falling 10 year bond yield would be indicative of slowing nominal GDP growth. So the fact that it stopped falling makes me pay a bit more attention as to what might be going on underneath the hood. And that’s a very loaded question, but at a high level you think, oh, well maybe the narrative here is changing a little bit.

Also within China, I think there’s a recognition from the leadership that they need to really put the pedal to the metal on domestic consumption. I think they wanted to do that a year ago and got broadsided by the liberation day, hoo-ha first quarter of last calendar year with tariffs going through the roof. So they had another issue to deal with, which I suppose delayed ultimately what they’re trying to deliver in terms of domestic consumption.

So I think there’s a couple of things that I’m noticing more recently with China. One is breadth within the market is starting to improve which is benefiting some of the holdings in the portfolio. So these were companies where fundamentally you saw nothing wrong with your thesis, they’re ticking the boxes, not getting recognition from the market, but that started to happen back into fourth quarter last calendar year. So I think breadth is improving there.

The other thing is China consumer, you know, that’s been a long term thematic. Everyone loved it 10 years ago, everyone kind of hated it post-COVID. But when you think about it, Chinese consumers really haven’t opened their wallet for two years. Yes, they’ve gone on holidays and wanted to buy experience for experiences for want of better words, but realistically savings just keep compounding. And I think after two years it wouldn’t surprise me if you start to see the purse strings open up a little bit. The equity market has rebounded strongly, as you pointed out, last calendar year, and that’s kind of continued on.

And again, if you are looking at consumer within China, some of these companies are starting to catch a bid. So for example, Macau Casinos. Up quite strongly. So you are looking for little data points and signals as to what’s going on. So within China, yes, there’s a skew in the portfolio towards consumer discretionary and there’s some of the factors that are driving it.