Jay:  Hey, Mark, thanks for joining us. We’re very happy to have you on. As one of the leading strategists in the region for the second-largest Chinese bank in the world, China Construction Bank, thanks for your time. Maybe for the audience joining in, you could give a brief introduction of who you are and a little bit about yourself.

Mark:  Sure. I’ve been in Asia for probably about 16 or 17 years. I came over the be the regional strategist for Deutsche Bank, and I was with them for a time before I joined CCB. Before that, I was a global strategist for Deutsche Bank in Australia. I have really looked across all asset classes — equities, bonds, credit, commodities, currencies. I was probably one of the worst currency strategists in the world at that time, but it was a lot of fun.

More recently, I’ve been mainly focused on Asian equities and Asian investment.

Jay:  In addition to that, you also advise some family offices as well. I guess they’re some of the Chinese family offices that you’ve just encountered that you’re doing some advisory for?

Mark:  Yeah, there has been a big growth in family offices in Hong Kong, particularly, I would say, over the last five years. A lot of these guys have been investing abroad for quite a long time, maybe 15 years. But there is definitely a keen desire to broaden their portfolios beyond just China.

Jay:  Do you find that the families that you deal with, are they market savvy or is there quite a large learning curve that they need to go up as far as global investing goes?

Mark:  I would say they’re very savvy investors, but I would also say they have huge biases in terms of what they want to invest in and the way that they like to invest. I would say generally there is very unrealistic… It’s taken some time to focus more on risk than on return, but generally I would say the family offices in Hong Kong are becoming as sophisticated as family offices anywhere else.

There are still very big differences though. Most of the family offices here have 60, 70, sometimes 80% of their portfolio in physical real estate, whereas family offices in Europe in particular have much less property and are much more heavily bond-focused. That’s part of an ongoing evolution, I would say.

Jay:  I guess it does make sense given the Asian preference for hard assets in real estate. Maybe we could start with an overview of the markets. You’re sitting privy to some pretty interesting information being there at the second largest bank in China. From your perspective, how are we looking right now? Markets are as expensive, it seems, as they’ve ever been, and it’s quite worrying for a lot of people. But at the same time, it seems like despite the maco data, geopolitical data that keeps coming out and the obvious headwinds up ahead with interest rates and even the US debt ceiling and this sort of thing, the markets still keep continuing to melt-up. Maybe you can give us a quick overview of how you’re looking at the current market environment globally right now.

Mark:  Sure. The first thing to remember is that equity markets always peak just before everything falls apart. So it’s very normal for markets to be strong late in the cycle. And that’s where we are. We’re very late in the cycle.

I think the way we’re viewing markets globally is that we’re in a very treacherous environment. The rally in the US has been driven by an unprecedently small number of companies who have got very little market breadth. We’ve got, as you say, historically high valuations. On our work, the US debt levels are back where they were at the peak in the last three cycles just before we went into a fairly significant decline.

Europe, everyone is excited about Europe at the moment. I don’t think we’ve seen any fundamental improvement in the sovereign debt problem there. I think bond yields are artificially low. Are they a bubble? I don’t know, but definitely they’re causing massive distortions.

In a nutshell, we think the markets are about as risky as they get, and we think that the market is about optimistically priced as it can get, so that’s a recipe for disaster.

I’ll give you an example. High yield debt in Europe is trading not far from about three and a half percent at the moment. That’s the yield you get. I think the long-term default rate on high-yield debt is about 3%. So you almost lose money on that pretty risky instrument.

So my guess is developed markets has minimal upside from here. And I think as we move into 2018, a couple of things with drive them start to start and drive them lower. I think the cumulative effect of that tightening is going to have more impact than what people think. Secondly, I think the mobile phone upgrade which is driving companies like Apple and Samsung here in Asia, that upgrade cycle will have peaked out by mid-next year.

In terms of the Asian markets, we’re a lot better positioned here. We don’t have the extreme valuations. We always benefit when the US market gets to this point. We get the overflow money starting to come out of the developed markets. It’s coming into Asia. I would say for now, in this part of the world, you just want to be in Hong Kong, China. I would almost forget the rest principally because we also benefit from the outflow from China.

China has some pretty significant outflow restrictions at the moment. Pretty much the only way people can legally get their money out is to buy Hong Kong stocks, so it’s cheaper than most of the region. It’s got better flow dynamics. It’s got stronger earning momentum, and the A-share markets are starting to break out.

I think in the short-term, we could easily get quite euphoric here. The Hong Kong market typically gets wildly euphoric. The rallies here are really short. I think we’re sitting at about 28,000 on the Hang Seng at the moment. We could easily get to 33,000 in the next few months. But this is a rally to sell. It’s a rally to sell. It’s not going to be sustained.

Jay:  Well, I think when it comes to investing in Asian markets, in my mind, there are two major deterrents for global investors, international investors, Western investors. Number one is a cognitive bias called home country bias which is not specific to Westerners. Asians have it too. People like to invest in what they know. You talk about US-based investors, they’re probably 80-plus percent allocated to their domestic equity markets or domestic markets or instruments in general. So that’s one thing.

But when they do get outside of that and cross that bias, and they come to Asia, they oftentimes struggle and end up not knowing how to navigate the waters, not knowing much about the markets, and they end up getting burned. Essentially that reinforces their home country bias.

When it comes to Asia, maybe you could give us a little bit of the background and nuances of the markets here. What are some of the major pitfalls that foreign investors coming into this market often face?

Mark:  There are many. Just like any market has lots of pitfalls, and we’ve all made more mistakes than we’ve done well in investing.

I think one of the main problems when people invest in Asia, people come here for growth, and they get seduced by the growth. But equity markets are driven by supply as well as demand. When you look in particular at the China market but all of the markets in the region have enormous supply. China alone is going to list 200 banks over the next few years. Enormous quantity of paper. That obviously is going to affect the performance of the Chinese banks over the next few years because people are going to have too many banks in their portfolio.

But also, often people will look for companies that have got strong growth, whereas often it’s the balance sheet that is driving the growth. The companies are either taking on a lot of death, or they’re issuing a lot of equity. So very often people will get pulled into companies that offer very high growth profiles and get disappointed by that.

The other problem, I think, with Asia is that, as you already alluded to, the investment psychology here is very different. To most guys in Asia, investment is the same as gambling. When Asians invest, they’re impatient. Often they’re looking for absurdly high returns. So if a stock is okay but has no fundamental drivers, it will go backwards. And very often, you’ll see people coming into Asia, they’ll find a stock and say, “That looks quite good,” but it’s got nothing really going for it. And they can’t understand why it’s not going sideways; it’s going down. And it’s very frustrating.

Asia can be very challenging for value investors. It can be a bit of a sinkhole.

What normally happens, therefore, when people come into this market, they start to invest like the locals. They get sucked into chasing the high momentum stocks, and this is fine, but the problem is that because this market is like a rollercoaster, it’s not really the same as the US. Often in the US, once the market’s peak, the high momentum stocks still can perform quite well.

Here, once the markets peak, high momentum stocks tank. They just absolutely tank. And so often we find guys coming into the market halfway through a rally. Late in the rally, they get seduced by the high momentum stocks, and then they get very disappointed when the market goes down, and they don’t come back for another few years.

The other thing, which I think is new for a lot of investors in this market, is risk has a big impact on performance in the way that equity markets perform in Asia. And so you really need to understand what drives these markets. When does the market rally? Why does it rally? When is it going up? When is it going down? And there is a lot of different fundamental drivers.

But basically, you can narrow it down to a couple of things, one of which is the US dollar. When the dollar is weakening, as it has been, that’s when these markets really run. If the dollar is starting to turn around and go back up again, that’s going to change the risk environment.

I think the other big pitfall is that I think when people come to invest in Asia, they treat the region as a homogenous zone, but it’s not. For example, in Korea, it’s very old market demographically. There is a lot of consumer debt. It’s fundamentally more like a developed market whereas some of the younger markets have got very strong demographics and not much debt. And, of course, obviously China is sort of in the middle. Its demographics are aging rapidly, and it has accumulated a lot of debt over the last few years.

But basically, depending on where we are in the cycle, you need to focus on different markets. Right here right now late in the cycle, you really only want to look at one market. You want to look at China.

Jay:  Interesting. Touching on what you just said about value investing in Asia, it’s extremely challenging. We see a lot of Western-educated investors come over, and they’ve learned a lot of fundamentals by the books, and they come over, and they realize that the companies are completely different. A lot of them have large state-owned holdings or large families behind them and have completely no shareholder-friendly type processes. And because a stock is listed, these families oftentimes still think that they own it. It just happens to be listed on a stock exchange. So they don’t really care about the shareholders. They just still continue to operate it like a family business, which I always found quite interesting.

Then you throw in the accounting differences and nuances and irregularities that happen, and it just makes for an extremely difficult market to trade.

Having said that, like you said, it’s people trading it like a casino. There is a lot of momentum players out there, a lot of retail players as well, which also makes it challenging. Although theoretically, if you take, for example, the Chinese A-share market, it’s something like 80-plus percent dominated by retail investors. So in theory, one would think that an institutional investor would have an advantage there in generating alpha, and yet they still keep coming and in stumbling. I’ve always found that to be interesting as well.

Again, I think the Chinese market is very complicated, complex, and, touching on your point about Asia not being homogenous — every single country trades differently; even within China, all the different provinces have their own nuances, so it’s an extremely, extremely challenging landscape to navigate. I guess that makes it fun for some investors, but for others, it makes it very frustrating.

When we look at China specifically, I want to touch on a little bit about China without going too deep into the rabbit hole here. Since you are working at a Chinese bank and you get some of the information that maybe some of us aren’t as privy to, there is a lot of concerns about the Chinese economy, the banking system in particular, the currency. These are all things that deter investors from looking at the market. Can you give your insider’s perspective, having been in the region for a while and having looked at China for a while? What actually is going on up there? Are we facing a banking crisis soon? Is our current administration false in saying that China is manipulating their currency?

Mark:  I guess the first thing I would say is that no one has a clue. I think if you come across someone who says they fully understand China, they really don’t. My take is that there are some major misperceptions about China in the West. I think one misperception is that there is this monolithic policy view within China. But that is not the case.

You have great diversity of policy views within China about how China should evolve and about what’s actually going on I China. Region to region, it’s very, very different. So if I look at Shenzhen across the border from Hong Kong, this is a powerhouse. It will always be a powerhouse. It will be a dominant economy in the world for the next hundred years, and several of the other eastern provinces will remain very strong. And that’s simply because of the tech advantages they have. China is becoming very dominant in key areas of tech.

First, I make three observations. The first observation is that, yes, the growth of credit in China is troubling and will ultimately lead to a significant and sharp slowdown at some future point. I think most of us and commentators think that that future point is tomorrow or a year ago. My feeling is that China still has quite a lot of debt capacity on the central government’s balance sheet. So they have been taking bad debts off the banks’ balance sheets. There are probably some problems with the smaller banks.

But I’m not expecting a banking crisis any time soon. What I think, though, is that China’s economy is so big and so vast, depending on what you look at, you’ll get a different point of view. But my overall view is that the auto sector in China is developing very, very rapidly. You can see Hyundai in Korea is in all sorts of trouble. The Japanese car makers are also in trouble. They’re going to be in a hellavuh lot more trouble two or three years from now.

So there are some real strengths in China’s economy there. Also on the fintech side, also just in terms of the whole e-commerce side, depending on how it evolves.

But I do think that my personal view is China is here to stay. China is a major economy. I think China’s economy will run into problems at some future point, but nearly every developed economy in the world has unsustainable debt levels and really lousy politics, really poor economic leadership and weak demographics. The emphasis on education in the West is in decline.

My overarching view of China is that it’s going to do well over the longer term. Fundamentally, I think that will extend across the region from China. I’m here for a reason. I think there are better prospects.

Jay:  Yeah, investors have to be careful about mainstream media, particularly in the US. It’s extremely biased and angled. It has a very political tilt to it whether you realize it or not. I guess once you get over here — this was the case for me — you’re able to differentiate between what is just propaganda, fear-mongering, political- agenda speaking versus what is actually the reality of the situation.

I’m in the same boat as you, Mark. That’s the reason I’m here too. I certainly think that China will have some growing pains, but for the long run, they’re not going to go anywhere, and I think there are a lot of opportunities that we will see within the next five to ten years across a number of different sectors and industries within China.

Let’s move on. You mentioned that you do some advising for family offices. What’s your investment process? What does that look like? Given the backdrop of what we just went over, globally where we’re sitting right now, with valuations where they are, obviously there are some geopolitical flashpoints coming up ahead that could potentially derail this bull market run, how do you position yourself right now? And maybe you could walk through a little of the methodology on how you look at investing your asset allocation right now.

Mark:  Sure. It’s a fairly standard approach for a family office. We take a top-down approach, and we begin with a broad asset allocation across bonds, equities, property, commodities, alternative assets. That top-down process is driven by some fairly structured decision rules which try to measure where we are in the economic cycle globally and try to measure how much risk there is. Basically, at the moment, that framework is telling us we’re late in the cycle. We’re in that part of the cycle where we normally see the commencement of a major equity bear market where we normally see, eventually, a recession globally. And depending on how things pan out over the next few months, we may see a risk event very soon, or it may be delayed. It just depends.

But obviously within that context, we’re running a very small exposure to developed equity markets. Most of the equity exposure now is in emerging markets, for instance, and most of the fixed income exposure is also in emerging markets just because the view is we’re not getting enough return for the developed bond markets but also because the emerging market, bond market have much stronger demographics. Fiscally they’re stronger.

We have a pretty big overweight in gold and some other defensive assets, mainly because I’m really not sure how this cycle is going to pan out. I don’t know if we’re going to see some inflation or not, but generally we’re in that part of the cycle where gold should pop.

Cryptocurrencies have made life quite difficult, I think, for asset allocation because a lot of the crazy money has gone there, and I think it’s drained some money out of the gold market, so it’s not performed as well as we would have thought.

I think if the dollar continues to break down, we’re going to see quite a big move at some point in oil. This all come through quite a structured process. And then we sub-allocate according across equities and across bonds.

Lastly on the currency view, the currency, for now, is that the dollar will continue to weaken. And then when we get down to looking at Asia, generally speaking, it really depends on a lot of things. In essence, the easiest way to invest in Asia is to keep it simple and work out what kind of risk environment you’re in because it’s so driven by momentum, and because mood is so important in this market. If you can work out roughly what the mood is going to be, it’s fairly simple to either say, “Well, people are going to be looking for momentum, or they’re going to be looking for defensive stocks, or they’re going to be looking for cyclicals or whatever.” That’s a big part of it.

Generally speaking, for the stocks we run a screening process, and that screening process focuses very heavily on looking at the cashflow characteristics of companies. The most important thing, if you’re looking for single stocks in Asia, the most important thing to focus on is look at the cash flow, particularly Chinese companies. Look for what we call accruals, basically look for companies that are booking lots of revenue without getting the cash in the door. We avoid those sort of companies.

Generally speaking, what you’ll find is that sometimes a screening process throws up lots of companies. There are lots of good companies. Generally speaking in that environment, you may as well just go with an ETF.

Jay:  That’s true.

Mark:  There’s not going to be a lot of alpha. But if there are very few companies that have desirable characteristics, then you want to overweight those companies in particular.

But in general, it’s a mix of ETFs. It’s a mix of some style investing at the moment. You want to have some momentum in the portfolio. So generally we have fairly concentrated momentum, and then a handful of stocks that you really like. Maybe three stocks where you really like the company. Usually, these are small mid-cap growth type companies where the management is solid. And these are the only buy-and-hold type. Everything is prepared to be flipped. But these sorts of companies, if you believe in them, then you stick with them.

Jay:  I think it’s important to differentiate that, particularly when you’re dealing with a family office type investor who, unless they’re a very large family office that has an in-house investment team, they’re not going to be watching the markets and savvy enough to be trading in and out of these sorts of positions. That layer that you said where you find good companies, maybe in the mid-cap range where they have solid management but they’re more of a buy-and-hold type play, those seem like an ideal fit for that type of client. They can sleep at night knowing that they don’t have to trade in and out of a position.

From a broad, top-down view, you mentioned earlier that a lot of Asian family offices have a large allocation in real estate, up to 80%. Would you then recommend that the non-fixed hard asset portion of that, let’s say 20% of their overall net worth, how would you then divvy that up at this point where we are in the cycle between equities, fixed income, and alternative asset classes?

Mark:  Well, basically we start up with… I’ll keep it simple. We think equities, bonds, gold. In where we are in the cycle, we’re actually still overweight equities, believe it or not. But that tilt has massively shifted to emerging markets beginning of last year but continuing on through. In terms of what we regard as a core, neutral allocation, we’re probably only a couple of percentage points above that. The equity allocation is not that high. A central base case would be around about 25%.

The big overweight is in gold, oil, and some other commodity cyclicals they would normally run in this phase of the cycle. But the industrial metals and so on have already been cut. So it’s really just oil and gold.

And then the bonds are underweight. If the US treasury yield ever gets to 2.5, 2.6%, that will be a big trigger for us. We’ll shift to overweight fixed income, and that will be a possible trigger for a risk event for us.

Jay:  Interesting. You mentioned a couple tips or pieces of advice. First, keep it simple. Obviously, with the vast variance across all the markets out here, it’s definitely wise to keep it simple. Secondly, look at cash flow, which I think is kind of a fundamental process, but a lot of people, like you say, out here in Asia particularly, don’t look at that sort of thing because they’re just chasing that momentum, chasing short-term yield. Any other quick tips for first-time investors that are looking to come into the market, maybe particularly into China?

Mark:  If you’ve never invested in China before, you probably need to at least find some kind of advisor. Look for someone who has been in the region for a fair amount of time. Can you imagine going to a resort of learning how to scuba dive without knowing how to swim? I find it amazing the number of newsletters, the number of advisors, the number of books on investments out there that have been written where it’s quite obvious that the person who is advising or writing the book doesn’t have a clue why stock markets go up or down. They’re just selling some system.

For me, the key thing about Asia is the importance of macro, the importance of risk. So you want someone who can explain to you, who at least has a strong emphasis on how Asian markets work and ways of measuring the risk environment.

Secondly, I would look for, if I’m trying to choose some kind of investment advice, I would look for someone who focuses on quality companies, at least has some emphasis on cash flow and possibly offers style portfolios because I think that there is no all-weather portfolio in Asian equities. That’s the thing.

Jay:  Ray Dalio.

Mark:  If you’re coming out of a big bear market, you want to be owning very different companies than you want to be owning right now. In the US market, it’s a much more measured market. The valuations don’t get so stretched. We don’t get so far from fundamentals, but here we do.

Jay:  Let’s talk in the next six months, your outlook on markets. Again, we’re late cycle. There is a couple of headwinds ahead of us, obviously. You mentioned coming to the need of that smartphone upgrade cycle as well. But you did say that we might see a little more of a run here, particularly in the HSI. What’s your outlook for the next six months on global markets?

Mark:  My guess is that the US will be putting in a big rounded top over the next three to six months. In that environment, I think we’ll find that the dollar will weaken. I think the US data is still quite strong, but I think it will start to show fairly clear evidence of deterioration. As that happens, the dollar will come under pressure. That’s a classic environment. I call it the EM Schadenfreude trade where Asian markets benefit from pain in the US. So I think we will pop a bit more.

I think at this moment, probably conservatively 10%, maybe if it’s normal, kind of rally it, maybe another 15, 20%. But I think by January next year, you probably want to be in lockdown mode and expecting weakness through the course of much of next year. I think that next selloff after it, I think that’s when you’ll get a very strong rally, particularly in the China market. And the reason why is that China will be forced to run easier monetary conditions than they have been for the last couple of years. And I think that combined with a weaker dollar will allow better liquidity conditions in China.

So I’m thinking you’re going to really be bull market after that. If you want to hop in now, do it for few months, but after that, keep your powder dry because then I think you’re going to get a good, solid bull market in Asia when, I think, Western countries will be kind of bogged down.

Jay:  Yeah. That’s an interesting outlook. I like that outlook. I think that’s pretty wise. Something you mentioned earlier, this is definitely a rally to be selling right now. You want to have some of that gun powder ready for if there is a dislocation event or a draw down in the markets and be able to position yourself for next year.

Mark, it’s been such a pleasure catching up with you. Thanks for sharing your thoughts and your insights. Tell us about what you’re working on these days. Anything exciting going on into the end of the year or anything exciting you’re working on for next year, either professionally or personally?

Mark:  I’m pretty busy with my day job and with friends and so forth, but I’ve got a few things. I’ve got three projects I’m working on. The first to is I’m going to start a blog. I’m probably the most un-internet-savvy person on the planet, so it’s proving a bit difficult, but I think it will get going at some point.

The second thing is I’m working on a couple of direct property investments in the Philippines.

And the third thing is I started looking at the frontier markets. I think the frontier markets are very interesting from a cyclical standpoint over the next few years. I think you’ll find that countries like Laos and Cambodia and Burma will do very well, partly as a result of the offshore spending initiatives of the mainland Chinese, the One Belt One Road initiative. But also I think these markets are reaching a critical mass. They’re quite sexy, so I’ve started looking at them. Those sorts of projects I’m looking at.

Jay:  The One Belt One Road initiative is on a lot of people’s radars because it’s been talked about so much, but I haven’t actually see anything concrete and actionable other than high-level stock plays on that. So I’ll be very interested to see what you discover as you do your research in emerging markets.

Also, is there any sort of thesis on the Philippines specifically or why you’re looking at property there?

Mark:  Well, my wife’s Filipino.

Jay:  There you go.

Mark:  It’s a cheap property market where you can get very good yield. It’s got excellent demographics. I think politically, some people have concerns, but I think politically, it’s probably the strongest democracy in Asia, English-speaking. I think they’re playing the Chinese and the Americans quite well against each other.

You can get yield there. It’s all about yield for me.

Jay:  Absolutely. I will definitely be interested to hear more about your projects there as well. Once again, thank you so much for your time. Where is the best place that our audience can connect with you, find you, follow you, maybe learn a little bit more about your projects that are coming up?

Mark:  I’ll be posting some things on a website called GreyGull.org. If people want to look for me, they can find me there.

Jay:  Fantastic. We’ll have that linked up in the show notes. Thanks so much, Mark. I appreciate your thoughts and your insights. We’ll talk to you soon.

Mark:  You’re welcome, Jay. Thank you very much.

Jay:  Alright.

Mark:  See you.