Understanding Markets

Bit of a shorter and informal post today, but I've done some work since my last post on Chinese equities. At the end of my last post, I made the point that China is becoming more economically independent, both in terms of its future growth and risks. From the rolling correlation graph between MSCI China and MSCI USA since 2007, we observe a decline in the correlations between the equity markets of the two countries since 2018. I evaluate diversification benefits relative to a US equity portfolio because even many Australians have outsized exposure to US equities. Many superfunds set their global equities benchmark as MSCI ACWI World Index which has a 63% weight on MSCI US.  If we optimise a portfolio of MSCI China and MSCI USA to maximise Sharpe ratio based on the last 20 years of returns, the optimal allocation is 30% MSCI China and 70% MSCI World. As mentioned by my last post, Chinese businesses' risk profiles have changed drastically over the last 3 years, so going forwards,...

The People's Republic of China was the only major economy that reported growth in 2020, during the COVID-19 pandemic . Two years on, its equity market is down 50% since February 2021 despite its central bank cutting interest rates two times this year. How has China struggled to bounce back from the COVID-19 pandemic? While Chinese equities currently trade at similar multiples to other emerging markets, they remain cheaper than most developed markets in spite of a higher expected growth rate. The underlying rationale for market participants requiring a premium compared to developed markets is China’s housing market debt crisis and the government’s increasing unpredictability since 2021 .  Figure 1. MSCI China All Shares ETF vs Emerging Markets  Figure 2. Value and Growth Measures Across Different Markets As per Figure 1, other emerging markets outperformed MCHI by about 12% over the past 5 years. Prior to late 2021, Chinese equities were outperforming with the recent reversal ...