American stock markets today, Friday, viewed several hours before the 9:30 a.m. EST opening appear poised to start strongly with all major indicators including the S&P 500, DOW and Nasdaq firmly in positive territory. Amongst these three the DOW is showing the highest gains and reaching 34,872 at time of writing. Canadian markets including the TSX60 are also positive. (These figures will all change during the North American trading day.)
European markets are open at time of writing and major indicators there including the FTSE100, DAX and CAC40 are in positive territory with the DAX showing the strongest gains at 15,667.70. (These figures will also change during the European trading day.)
European markets can be confusing, according to James Athey, Investment Director at Aberdeen Standard Investments in London. “The pendulum of investor sentiment continues to swing from one extreme to the other – as it has since late 2019,” he says. Athey explains that the market has displayed a form of amnesia and myopia looking for a full and complete economic recovery with no long-term ill effects.
Amongst precious metals the safe havens of gold and silver are down.
Amongst currencies, the British pound sterling, Euro and Canadian dollar are all down against the American greenback, reflecting both a strengthening of the greenback and a weakening of the other currencies.
In previous editions of this column, I have suggested that investors are confronted with a number of serious decisions and some of them might have seemed near-unthinkable before or during the pandemic crisis. Some of those decisions are triggered by troubling news events more than the crisis.
The advantages of investing abroad and reducing the home bias even by a limited portion in a portfolio are clear but at the same time recent developments may understandably discourage some investors and two of those developments involve China. Understanding the situation in Hong Kong means understanding its change in historical status. When the British government turned Hong Kong over to China in 1997, China attempted both to pacify those worried about its future and to have the proverbial ‘best of both worlds’ by granting Hong Kong status as a so-called Special Administrative Region. It was – to a point at least – autonomous. For years it worked: China got a free-wheeling capitalist territory and an eye and ear on the Western world while the West had a gateway into China.
That has now changed, explains Adam Choppin, Assistant Portfolio Manager at Xponance Asset Management and Investment in Philadelphia.
“While Hong Kong still exists on paper as an autonomous region in China, that autonomy now effectively only exists on paper,” he says.
“Hong Kong remains a different market for the purposes of portfolio investors, with key differences in market structure, liquidity, and access from its onshore cousins, but for the purposes of assessing political risk, Hong Kong is now one with China.”
Choppin explains that investors with Hong Kong exposure but comfortable with Chinese political risks do not need to take action immediately. However, those who are uncomfortable with these risks in their portfolios should review their holdings in order to make an informed decision on the risks or benefits of Hong Kong exposure. Those with illiquid Hong Kong investments such as real estate outside of real estate investment trusts (REIT’s) should undertake a full-scale review.
In terms of Chinese companies listed in the West, the government clearly plans to take a more hands-on approach. Most recently it announced a huge ‘enforcement’ action against Didi Global, a ride-hailing company there.
That came two days after the launch of its initial public offering. Didi commands approximately 90% of the Chinese market including bicycle rentals and other services. Yesterday Bloomberg reported that Chinese regulators are considering serious penalties for Didi after its controversial initial public offering last month which it undertook in spite of objections from the Chinese authorities. That move should be seen in the light of last year’s Ant IPO cancellation, the raft of anti-monopoly regulations in the Chinese tech sector and recent announcements about education n China.
These developments do not necessarily mean staying out of China investments, Choppin says. However, they should reduce what one is willing to pay in this environment and they definitely increase the importance of active investment management.
All of this being the case, extreme caution is the best strategy with China investments.
Al Emid is a financial journalist broadcaster and author. His next book. The 2022 Emid Report on Volatility is scheduled for a Winter release.