The U.S.-China equities gap may narrow by as much as 30% in coming quarters, according to a formerBrevan Howard Asset Management LLP trader who led his macro hedge fund to a double-digit gain in the first quarter.
With 10-year government bond yields in China approaching 3%, Asia’s biggest economy has “colossal” fire power to cut interest rates and bolster domestic stocks, said David Adams, the chief investment officer of Sydney-basedReminiscent Capital Pty. The price gap may narrow either through U.S. market pullbacks, China share rallies, or a combination of both.
Countries globally have unleashed unprecedented spending to counter the economic shocks from the coronavirus pandemic, with central banks resorting to ultra-loose monetary policies. Investors hunting for yield have pushed up the S&P 500 by almost 50% since mid-March; the CSI 300 Index trails with a gain of around 30%.
“If you’re starting to feel like the U.S. monetary base expansion and price movement is getting somewhat extended, it would be very, very plausible that money that’s still chasing assets will start to find its way into emerging markets,” Adams said.
Hamstrung by trade tensions and slowing economic growth, boosting stocks is one of the few avenues left for China to restore consumer confidence, he added.
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China’s CSI 300 Index is trading at 13 times next year’s estimated earnings versus about 20 times for the S&P 500, data compiled by Bloomberg show.
Reminiscent, whose fund returned 14% after fees in the first quarter and 8.2% in the first half, is also positioning for a possible appreciation of the Australian dollar against New Zealand’s currency.
Investor money fleeing fiat currencies for real assets tends to go first into precious metals, such as gold and silver. It has the potential totrickle down to Bitcoin, basic materials and resources, Adams said. Spot gold touched a record earlier this month.
That bodes well for the effectively iron ore-backed Australian dollar relative to its New Zealand counterpart, which leans on soft commodities such as agricultural products, he said.
Also bolstering the case is the Reserve Bank of Australia’s intention to keep interest rates from going below zero, while New Zealand hasopenly talked about potentially negative rates, Adams said.
After stints at investment banks, Adams joined Brevan Howard’s Hong Kong office in 2012 as a portfolio manager. He started his own hedge fund in February last year in partnership withPinnacle Investment Management Ltd. A version of the fund domiciled in the Cayman Islands opened to outside investors in May this year.
Reminiscent had A$24 million ($17 million) in assets under management as of July 31.
Most of the fund’s investments are in interest rates, currencies and equity derivatives. As much as 80% are one- to nine-month trades that seek to profit from two to five major macro themes that signal a shift in long-term trends. As much as 40% of the fund’s investments can target shorter-term market mispricing.
In the first quarter, Reminiscent picked up on early signals in Australia and New Zealand about how the spread of Covid-19 would affect asset prices, Adams said.
That allowed it to position to profit as the pandemic’s impact initially hit the fixed-income market, then spread to currency and equity volatility before investors fled currencies such as the Australian and New Zealand dollars for the safety of the greenback.
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