Weekly Update: Saxo Thematic Investing Performance
Head of Equity Strategy
Summary: Last week was driven the narrative that China is about to significantly ease its strict zero Covid policy but interestingly enough our two Chinese theme baskets were not aligned in terms of conviction of how fast it can be achieved. Our China consumer & technology basket, which consists mostly of liquid technology and consumer stocks traded in Hong Kong, was up 4% while the China's little giants basket, which consists most of stocks traded on mainland exchanges, were down 1%. Another key development last week was Bullard's hawkish comments on policy rates slamming our bubble stocks basket down 9% last week.
The Chinese paradox
Last week was driven by two narratives and trades. China is reopening its economy loosening its strict zero Covid policy and Europe must increase its military strength after a loose missile struck ground in a small Polish town close to the border of Ukraine. As a result our China consumer & technology and defense baskets were the two best performing baskets up 4.4% and 2.3% respectively.
What is a bit striking is the divergence between our two Chinese baskets. The one tracking the large cap consumer and technology companies was up 4.4% and consists of many liquid stocks traded in Hong Kong and thus more easily accessible by foreign investors. The other basket tracks the little giants of China, which are mainly hardware technology companies listed on the mainland exchanges and thus are dominated by domestic flows, and was down 1% last week. Was last week a story about foreign investors buying the ‘Xi pivot’ on the country’s Covid policy and domestic investors less certain about the direction and speed?
In any case it is clear today that the path to leave the strict zero Covid policy will be a lot more bumpy. Shijiazhuang, a city of 11mn people around 300 kilometers from Beijing, has moved back into a restrictive policy mode forbidding residents in high risk areas to leave their homes. While China has a lot of incentive to opening up again to kickstart the economy the path is likely not to be smooth as investors have priced in over the past two weeks.
Bullard’s hawkish remarks slam bubble stocks
Last week’s performance among our theme baskets was also characterized by the 9% decline in our bubble stocks basket. This was due to Fed James Bullard’s comments that higher interest rates have had little impact on inflation and that the policy rate could be set at 5-5.25% before being within the ‘restrictive zone’ which is 125 basis points above the current policy rate. This more restrictive monetary policy outlook is negative for long duration assets such as bubble stocks that have negative earnings expectations over the next year and are priced at high equity valuations.
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