China: An investment opportunity

Do you have a good understanding of China? What about as an investment opportunity?

The idea that China is mostly low-cost manufacturing industries, with sweatshops and copycats, no longer holds true. A few facts to know:

• China has the second largest economy, and soon to be the largest

• The second largest stock market

• An economy generating 50% of GDP from the services sector

• The most advanced manufacturers of personal drones, robots, and speech recognition software

• The largest middle class with over 550 million people by 2022

There are four trends moving forward in China to consider.

1. China is becoming more efficient with the development of technology. Everything from travel and immigration to transportation is improving with the use of artificial intelligence.

2. The language barrier is closing, quickly. The Chinese population is adapting to a shifting economy with more becoming comfortable speaking English. Restaurants, entertainment, train stations, and other activities are all becoming accommodative for the English language.

3. The Internet is not as restricted as you might think. It is true China bans foreign internet companies like Google and Amazon, as well as monitoring all of your Internet traffic. However, it isn’t too difficult to bypass these restrictions with a Virtual Private Network (VPN) or even prepaid SIM cards with built-in VPNs. Although Beijing might make it difficult to access the Internet freely, it isn’t impossible.

4. The Chinese stock market is getting a boost. As the Chinese role in the global economy has grown, the money flowing into the Chinese stock market has grown significantly. MSCI, the world’s leader in equity-based indexes, recently quadrupled the weighting of its China-listed stocks in its global indexes, resulting in as much as US$125 billion of new funds flowing in.

Source: Brian Tycangco

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What to buy when entering a new cycle or recession

Investors have historically tended to benefit from de-risking towards the end of the cycle.

Go neutral risk, not underweight

It appears to not make sense to be too bearish via a significant underweight or short position in equities, when earnings are still growing like the past six months, when markets have surged ahead.

But what should investors do given we must be getting closer to a global recession? 

Buy quality

JP Morgan says quality is particularly important to be sure a portfolio doesn’t contain the companies that have overleveraged in this expansion.

Quality stocks tend to outperform in a downturn. 

US Treasuries still offer protection

While gilts and European government bonds look unattractive, US Treasury yields can still fall further in an environment where risk sentiment deteriorates.

You give up the yield, but if you buy a Treasury with a 2 percent yield as a hedge to your equity book, you’re not buying it because it has a 2 percent yield, you’re buying it as insurance.

Other options include traditional safe-haven currencies such as the Japanese yen, as well as gold.

You can’t rely on hedge funds

A lot of hedge fund-style strategies that take long/short positions in equities can end up correlated to equities. Equity-market neutral funds, which are meant to have very little exposure, historically have quite a high correlation when the market turns.

JP Morgan prefers macro hedge funds, which base their holdings on macroeconomic views of individual countries.

Infrastructure for stability

JP Morgan says that core global infrastructure may also help to diversify portfolios. In return for a lack of liquidity, real assets can offer a relatively defensive income stream.

If you are able to deal with the lack of liquidity, they think that things like infrastructure look more attractive than private equity or private credit, given the defensive income stream.

Source: JP Morgan

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What's Happening with Crypto

In May 2019, crypto professionals and enthusiasts from around the world gathered in New York City for a block-chain conference. Four key messages came from this:

1. The “big money” is buying bitcoin There are now billions of dollars in institutional money including banks, hedge funds and other big organisations waiting to invest in crypto. There appeared to be consensus that hedge funds, venture capital funds, and pension funds have already started to invest in crypto. A recent survey by Fidelity Investments found 22% of institutional investors already own digital assets.

2. Crypto is redefining money An example of how digital assets are already being used is converting solar power into tokens. This is done by the owner of a home equipped with solar panels receiving tokens (similar to credits) for every kilowatt of power the panels produce. Once he has his tokens, he can trade them directly for other services including, for example, streaming movies. This way individuals can trade without ever touching a currency. This is what people mean when they talk about crypto “tokenizing value”-generating a tradable token rather than money for a product or service.Many believe that just about everything will eventually be tokenized.

3. The US needs regulatory clarity The crypto industry is changing so rapidly that no one exactly knows how crypto will be used years from now. That makes the regulator’s job almost impossible. It’s like building guard rails for a road without knowing the destination. At the moment, the SEC and the US don’t consider bitcoin or ethereum to be securities. This means investors who hold them, and the companies that work on them, are not subject to the same regulatory risk as many other crypto’s.

4. The “Crypto Spring” may be here Bitcoin rose from $188 USD in January 2015 to nearly $20,000 USD in December 2017. That boom was followed by an epic dust referred to as the “crypto winter” where Bitcoin’s price collapsed more than 80% during 2018 to a low of $3200 USD. The crypto winter forced entrepreneurs to stop thinking about crypto prices and start working on products that the world wants and needs-which is exactly what the industry needed. The consensus at the conference is that we are now in “crypto spring”. Bitcoin prices keep slowly heading higher. Bitcoin is the top performing asset class in 2019 up nearly 100%. It still has some way to go.

Crypto is still on the fringes of the mainstream, but that may change quickly.

Source:

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