In today’s Fat Tail Daily, I have an interview with a China expert for you. Louis-Vincent Gave of Gavekal Research gives his views on the recent Chinese stimulus, and why it’s not just a flash-in-the-pan.
He tells you what commodities he’s bullish on (not iron ore), why he’s very bullish on oil and energy, and the one ASX-listed coal stock he owns.
I’ll get to that in a moment. But first, some context…
In late May, I recommended members of my Fat Tail Investment Advisory service buy a few ASX- listed China ETFs.
In a world of fully priced stock markets, China was the standout contrarian play. I wrote:
‘In a world where major stock indices are at or near all-time highs (Australia, the US, the UK, France, Germany, India, and Brazil), China offers a very compelling relative value trade.
‘Actually, it offers relative AND absolute value.
‘One of the rules of contrarian investing is that every asset or company has a price where you would or wouldn’t invest in it. A good company can be a bad investment. And a bad company can be a good investment. It all comes down to the price you pay.
‘Right now, Chinese stocks are cheap.’
As often happens, these cheap stocks got cheaper. Fears grew about the health of the Chinese economy. Iron ore prices started to crater. The steel industry was profitless.
But other circumstances drove that, too. Steel mills were clearing inventory ahead of new production specifications that came into effect in late September.
In short, I didn’t think the situation was as bad as everyone thought.
But what do I know about China?
So I reached out to China watcher Louis-Vincent Gave to get his take on the Middle Kingdom. Gavekal has been based in Hong Kong for 25 years. Louis and the team frequently visit the mainland.
I wanted to get his insights on just how bad things were.
We arranged the interview in late July/early September for 1 October. In late September, China announced a raft of stimulus measures. Global capital came pouring in.
One of the ETFs I had recommended surged nearly 60% in a matter of weeks. That was enough for me. I issued a sell recommendation on Monday, 7 October, getting lucky in catching the high for the move.
But I think what’s being missed in the wild volatility of the Chinese equity market is the shift in global capital taking place.
Chinese stimulus plus falling short-term interest rates in the US is bullish for the beaten-up commodity sector.
This is the start of a rotation out of banks and into resources. It’s not obvious right now. But I expect this trend to persist into 2025.
On Monday, the Financial Review reported on this trend…
‘Beaten-down resources funds are making a comeback after policy pivots from China and the US – the world’s two largest economies – prompted fund managers to deploy capital in the hope that commodity markets are on the cusp of a resurgence.’
For US markets, it’s a rotation out of large cap tech into cyclicals.
Nvidia’s share price peaked in June (although it’s close to making a new all-time high). Amazon, Alphabet, and Microsoft all peaked in July. Meanwhile, the S&P500 is hitting new all-time highs.
In my view, the global shift in investment capital has started. China was the catalyst.
Watch the video for Louis’ take on recent events and tell me what you think in the comments box. The interview was recorded on 1 October for members of the Fat Tail Investment Advisory.
Regards,
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Greg Canavan,
Editor, Fat Tail Alliance, The Insider and Fat Tail Investment Advisory
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