A fresh new business cycle is playing out in China and we are still at the initial recovery stage of a cyclical bull market in Chinese equities. Leading indicators have turned up and long bond yields have bottomed for a few months, even though earnings revision trend has slipped again in Sep. China’s macro policy easing since 2Q have facilitated a board-based economic recovery but there is still room to roll out more incremental stimulus amid the drag in global recovery because of the second wave COVID-19 outbreaks in US and UK/Europe since July/Aug. Looking ahead, more evidences of earnings acceleration and an easing of Sino-US political tensions will support Chinese equities further and could reverse the negative outflows of China funds. Finally, the huge valuation dispersion between Growth and Value stocks does signal long-term opportunity for value investors.
Seresia Plutus MARS seeks to achieve positive return regardless of the prevailing market conditions. We constantly make strategic and tactical adjustments in our China centric multi-asset (stock, bond, currency, real estate, and commodity) portfolio depending on our assessment of different economic/industry cycles and liquidity condition. The heart of our investment approach focusses on business cycle associated trends for bonds, stocks and commodities. The optimal asset allocation and sector rotation for investment portfolios can be adjusted based on different stages of the business cycle in order to increase returns. Moreover, the information content of the business cycle can steer us to invest in different and non-correlated assets with the objective of lowering the risk related to an investment portfolio.
The premise is that by tactically adjusting the exposure in different asset classes along the different stages of the cycle, one can optimize market exposure to best maximize risk-adjusted returns. Compared to more traditional balanced funds that would adjust asset weighting incrementally over time, we try to focus on building more skewed investment positions on the “sweet spot” of asset classes and sectors/industries that would generate positive returns and/or relative outperformance at different stages of a cycle.
We believe that tactical asset allocation has a greater impact on portfolio returns and market risk than individual investment selection, especially over long periods of time. An investor can be average at investment selection but good at tactical asset allocation and have greater performance, compared to the technical and fundamental investors who may be good at investment selection but have poor timing with asset allocation.
Obviously, each economic and market cycle can be somewhat different. Changing business cycle characteristics can come from substantial structural differences that take place over time. The source of such transformations might emanate from demographic make-up, technological innovation, social trends and so forth. At Seresia Plutus, we deploy a great deal of efforts to understand the different stages of economic cycles as well as how the unique global and structural backdrops would influence the market development and asset returns.
Borrowed from the Austrian Market Process School that reject the Efficient Market Hypothesis, we also appreciate two important observations. First, there are significant government interventions that make the market remarkably inefficient. The most important is the business cycle and monetary problems that have mostly been caused by central banking in recent decades. Second, governments intervene are often not understood well enough by investors or they don’t always understand the implications. Thus, it is our job as investment managers to incorporate these implications of those non-market forces into our strategic and tactical allocations. From time to time, we would be able to identify the investment opportunity presented by central banks’ interventions or non-market distortions.
© 2019 Seresia Asset Management