c a pital commentary: august 3 · ent geopolitica l’s observation w recedented me deems in not o...
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CHINThe Chines
recent mov
novel, polit
empty citie
intervention
maintaining
essence of a
Chinese ma
PREDICT
“I
pe
Si
The circum
different th
China. Whe
equity mark
interests, bu
bolstering t
inching clos
these objec
intervention
RepercusThe slowdo
that those d
moderation
markets. Th
A’S CHe nation has in
ves in the South
tically and cultu
s just some of t
ns or subseque
g the orderly p
a free capital m
arkets through a
TABLE SELF
I cannot forecas
erhaps there is a
ir Winston Churc
mstances in whic
han that of Russi
ether manufact
kets, the Chines
ut also those of
the confidence o
ser to a more ca
ctives. Indeed,
ns have the pote
sions of Slowown in Chinese G
data aren’t the
n in the fundam
he accelerated
InC A
AOTIC Psome form exis
h China Sea sug
urally foreign ca
the more obvio
ent reforms ma
progression of
market. In addit
an additional set
F-INTEREST
st to you the act
a key. That key
chill, BBC Broadc
ch we find the
ia at the dawn o
uring islands in
se government s
the ruling Com
of the populace
apitalistic societ
the past year’s
ential to breed d
wing Growth GDP is well-doc
whole story. Al
mental dynamics
deterioration in
nneaA P I
PROGRsted for millenn
gest a youthful
apitalistic reform
ous. While we ca
ade by the Chin
the Chinese ec
tion to classic m
t of lenses to res
tion of Russia. I
is Russian nati
cast, London, 10
Chinese state,
of World War II
n the South Ch
seems intent to
mmunist Party. S
and thereby fo
ty, past heavy-ha
s boom-bust cy
disorder, even ch
cumented. How
long with China
s of the compan
n those fundam
altaT A L
ESSIONnia. And, yet, it
nation testing
m has led to ev
annot exactly p
nese Governme
conomy. Noneth
methodologies fo
solve the unique
It is a riddle wr
ional interest.”
.01.1939. Via The
within the cont
I. Even so, we fin
hina Sea, or imp
pursue any ma
Superficially, the
rtifying the pow
anded approach
ycle in the ma
haos.
wever, while we k
a’s ongoing mod
nies represented
mental trends w
a
N is in many way
the limits of its
vident misalloca
predict the timin
ent, we believe
heless, these ac
for capital mark
e risks they pres
rapped in a mys
e Churchill Socie
text of the pres
nd Sir Churchil
plementing unp
anner of goals it
ese goals includ
wer base of the
hes may find les
ainland equity
know what the p
deration in mac
d by the ETFs w
was among the
COMMENTA
ys still very you
s global influenc
ations of capita
ng or nature of
that they will
ctivities are no
ket evaluation, i
sent.
stery inside an
ety London
sent geopolitica
ll’s observation w
precedented me
t deems in not o
de maintaining m
ruling class. As
ss success, perh
markets demo
published data
croeconomic gr
we have chosen f
primary driver
ARY: AUGUST 3
ng in the world
ce. And the pur
al, newly built b
f future equity m
be in the inte
ot consistent wi
investors must
enigma; but
al climate, is ce
well-suited to m
easures to supp
only the country
macroeconomic
s the country m
haps even work a
onstrates how m
suggest, we also
rowth, we have
for the Chinese
rs for our Inve
3, 2015
d. More
rsuit of
but still
market
erest of
ith the
review
ertainly
modern
port its
y’s best
c order,
matures,
against
market
o know
seen a
equity
stment
Committee’
sidestep the
We also un
impacts of
developmen
ongoing inc
actual redu
46% from
commoditie
sectors is do
China’s slow
and broade
world, inclu
valuation s
allocations.
adjust tactic
1 It is necessawho invest inexchange. Whrepresent abomore mature,particular wou
’s decision to tr
e recent turmoil
nderstand that
its gluttonous
nt of infrastruct
creases in suppl
ction thereof ha
a post-financia
es across five se
own substantial
wdown, therefo
r global growth
uding many of
upport generall
Nonetheless, w
cal allocations a
ry to distinguish thn Chinese equities, hile the number of out a third of the m
larger-cap companuld make “more rea
rade out of our e
l that rocked eve
China has been
hunger for infr
ture in China h
ly focused on m
as contributed t
al-crisis peak s
ectors (energy, a
lly from that nea
ore, is obviously
. As it happens,
the remaining
ly remains stro
we continue to
accordingly.
he Chinese marketsbut who don’t live
f individual equitiemarket cap of all Ch
nies. They also histasonable” a dramat
exposure to the
en the larger, m
n a primary co
rastructure have
as clearly been
meeting what wa
to a global comm
set back in Ju
agriculture, live
ar-term peak: 5
y being felt in th
the companies
Asian exposure
ong such that I
assess the imp
s in which we histoe there, define Chins on the mainlandhinese equities. Whtorically have beentic understatement
e Chinese equity
more stable Chin
ontributor to gl
e multiplied ac
a key contribut
as expected to b
modity decline t
une 2014. That
estock, industria
5%, 27%, 13%, 2
hose companies
tend to be more
es within the C
Innealta’s Inves
pact of evolving
orically have investna’s stock market b
d China exchanges hat’s clear in that d
n more reasonably .
y market on Jun
nese equities trad
lobal macroeco
cross the sector
tor to the comm
be continued gro
that has left the
t index tracks
al metals and p
22% and 19%, in
s directly and in
e heavily repres
Country Rotation
stment team re
g trends in com
ted from those thatby the nearly 150 Cis almost 20 time
distinction is that tpriced than their m
ne 17th, a decis
ding outside of
onomic growth
rs and downstre
modity super-cy
owth in Chinese
e S&P GSCI Tot
24 commodity
precious metals)
n that order.
ndirectly tied to
sented among m
n Portfolio. Am
emains comforta
mmodity and ot
t have made the mChinese companies that number, thethe Hong Kong sh
mainland counterp
AUGUST 3, 2
sion that allowed
mainland mark
more broadly,
eam within eac
ycle. A combina
e consumption
tal Return Index
y futures on ph
) and each of th
o commodities s
much of the deve
mong these expo
able with the p
ther markets an
most news lately. Mos listed on the Hone Hong-Kong-listed
hares reflect predomparts. This latest ep
2 2015
d us to
kets1.
as the
ch. The
ation of
and an
x down
hysical
he sub-
sectors
eloping
osures,
present
nd will
ost folks ng Kong d names minantly pisode in
3
Stocks foOne may ar
the broader
capital mar
governmen
disconnecte
rally as an
economic r
accelerated
to rein in m
provided am
Once the ti
gains were
progression
The motiva
confidence.
able to igno
rule, model
risk of inve
elevating th
r All and All frgue that the Ch
r economy, eve
rkets, in the vi
t’s involvement
ed from the rea
expression of th
eforms,” accord
expansion in m
margin balances
mple momentum
ide turned, the
a reflection of t
n.
ations for these e
. But, the gover
ore: through dir
l or public comm
esting in both m
he hurdle to entr
for Stocks hinese Commun
n if those polic
ews of Party le
t is obviously ch
al economy as a
he ongoing “ma
ding to the Peop
margin debt, det
s may have been
m for the decline
government lik
their reform wo
exercises in ove
rnment now has
rect action it wil
ment. Given the
mainland and off
ry, at least from
nist Party mostly
cies have resulte
eaders, are very
hallenged, not
a result of the P
acroeconomic s
ple’s Daily (via
tailed in Figure
n the initial trig
e to feed upon i
kely presumed i
rk and that they
ert control can in
s set a preceden
ll limit or deny
se added uncert
fshore Chinese
m our purview as
y has been effec
ed in the misal
y much part of
least by the fac
Party’s broad ran
support for Chin
The Financial
2, as investors g
gger for the dec
tself.
it had to interv
y still were very
n many ways be
nt that all inves
the proper func
tainties, there is
markets. These
s tactical opport
ctive in its interv
llocation of reso
f that desire fo
ct that the coun
nge of interven
na’s developme
Times). The ch
gambled on its
cline, with the e
vene in order no
y much in charg
e categorized as
stors—domestic
ctioning of the
s no denying th
e risks are diffic
tunists.
ventionist ende
ources. We now
or an orderly p
ntry’s capital m
ntions. The Part
ent strategy and
heerleading resu
continued rally
expansiveness o
ot to lose the n
ge of the nation’
s altruistic, inten
c and internatio
capital markets
at recent action
cult to quantify,
eavors as they re
w understand th
progression. He
markets are som
ty had encourag
d the intrinsic fo
ulted in a massi
y. The Party’s att
of the leverage
narratives that m
’s continued eco
nded to boost in
nal, alike—will
s as it sees fit, w
ns have heighten
but have the ef
elate to
hat the
ere, the
mewhat
ged the
force of
ive and
tempts
having
market
onomic
nvestor
not be
without
ned the
ffect of
4 AUGUST 3, 2015
A DISTINCTIVE CHALLENGE
Uniquely influential in geopolitical and macroeconomic matters, China seems at once boundless in its potential to create
investment opportunity and confounding in its ability to stymie otherwise appropriate analysis. Observations in regard to
potential gain must account for a range of risks specific to the country’s evolution. In the end, Innealta’s Investment Team
retains a cautious eye toward the Chinese equity market, while mindful both of the positive and the negative implications for
China’s dynamic role in and impact upon global markets.
IMPORTANT INFORMATION
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independently verified. The security information, portfolio management and tactical decision process are opinions of Innealta
Capital (Innealta), a division of AFAM Capital, Inc. and the performance results of such recommendations are subject to risks and
uncertainties. For more information about AFAM Capital, Inc. please visit afamcapital.com. Past performance is not a guarantee of
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