“Never take your eyes off the ball – even when it’s in the referee’s pocket.” – Christy Ring

This morning a friend of mine texted me on his way back from an extended week long Easter break with his family to a remote island in the Philippines. It was so remote that there was no mobile service on the island, let alone internet connectivity and he was completely unplugged from the rest of the world and markets.  As soon as he got to the airport to catch his flight back, he texted me:

“Hey bro.  No internet on this island.  What happened to the markets while I was away?”

Jeez.  What hasn’t happened, I thought to myself.  As I started to type out a lengthy reply to him about the latest trade war spat that caused yet another violent sell off only to be alleviated by President Xi’s accommodative speech at Baoa, I paused for a moment and thought about how ridiculous it was recapping the significant yet strangely non significant events of the last 10 days.

As of this morning all seemed to be in the clear after Trump “praised Xi Jinping’s kind words on trade” and Zuck’s comfortable performance in the Senate hearings gave investors a nice 5% bounce back overnight in the name.  

In truth, despite the volatile two weeks of whipsaw trading, in reality, not much has changed. I quickly deleted my lengthy text to him and instead pulled up a chart of the S&P for the last 10 sessions and replied:

“Didn’t miss a thing bro…you should have stayed longer.  How was the break?”

S&P back to square one; Source: Bloomberg

 

Pulling up a chart of the HSI over the same period paints a similar but slightly rosier picture.

Nothing to see here either; Source: Bloomberg

 

Once again we sit at a crossroads trying to determine if the escalating trade dispute is actually as damaging as the mainstream media makes it out to be, or if the market is just taking it in stride and we still have juice left in this bull run.

By comparing these two short term charts it would seem that the US markets have actually taken on characteristics more common to emerging markets in times of volatility including nervousness and erratic price action.  Indeed if we take a look further back to when this current correction first began at the end of January both EM and the Hong Kong markets have actually performed with a great deal of confidence. Markets are in fact above the level they were trading at when the initial news of US tariffs broke and yet the market has taken each mini spat in stride.

It’s way too early to say that the current correction, which started in January, has ended but some of the technical traders and chartists I’ve spoken to this week argue that if we don’t see a sharp correction in the coming week or so we are due for a strong rally from here on out.

So what do we do?

You already know my answer to that question but if you have an insatiable desire to be trading these markets then the best performing sectors in the late cycle are usually defensives such as healthcare and consumer staples. Cyclical growth sectors such as tech and consumer discretionary tend to perform inline but are the first to be sold off in a correction (as we’ve seen the FAANGs and Tencent) and first to rebound as well on a rally. Utilities and telcos always underperform in a rising interest rate cycle and real estate…well, I think we are all in agreement that no one has a f$%king clue on how real estate will do from here on out, particularly in Hong Kong!

Regardless of where this market goes, it is clear that US interest rate overshoot and policy error leading to a trade war are the current elephants in this room. The tax cuts and potential infrastructure projects seem to be working in the US and growth is accelerating. The longer growth says at the current level, the greater the risk of interest rate overshoot.

As far as policy error goes I really can’t see it getting out of hand into a full blown trade war, but even if it does and sentiment pulls the market back that only means that EM valuations will come down and pave the way for a buying opportunity in the region.

Remember, China is the only major economy in the world that has a whopping 6.5% GDP growth target baked into its economic policy and the PBOC is in fact the important central bank in the world.  People just don’t know it yet or they choose not to acknowledge it because of whatever excuses they want to use (such as the country’s debt situation and or negative stigmas around doctored economic data).

The cold hard fact is that China’s stock market only accounts for 10% of the world’s market capitalization (vs. the US which accounts for 51%) and that Tencent is now the 6th largest publicly traded company in the world (larger than JP Morgan and Berkshire Hathaway).

The bottom line is China has, does and will matter in the future and with a significance that most still refuse to accept.  

Are you ready for the inevitable?