China data

BHP, RIO, FMG, most resource companies, are trading weaker because of the China data.

Below you can see the flow of credit, new loan data, by type. Let your eyes drift to the bank loans (bottom left), where 443 is a small number (barely visible!) compared to usual prints.

The same approach can be taken to the total, top left, and overall, the data on new loans in CNY was about 50% below consensus. That’s a lot!

The PMI data from last week was also disappointing, with manufacturing contracting (below 50), at 49.2

Before that, we had the trade data, where China’s enormously large trade surplus is not a sign of strength. Michael Pettis convinced many of us long ago that big surpluses usually mean either undervalued currencies or unduly competitive wages (as in, households are not getting their fair shares of wages, which should be higher).

Note the import data, in CNY, which was weak, and matches that above story of weak domestic demand, in which there’s too much saving, and not enough domestic consumption. Manufacturers get lots of assistance/subsidies (financed through and/or by that low household share of income) which pushes out supply, resulting in excess capacity, and hence why we keep seeing weak consumer/producer inflation prints.

What’s the point?

Well, commodities ran really hard on the China reopening story. We were sceptical of it then, thinking that China would not be pushing hard on the fixed asset investment story (given it just can’t/won’t work) and that there’d be a flurry of reopening activity, but we weren’t going back to the old investment-led model.

And, that on it’s own, China’s growth story wasn’t strong enough. Even as I type, it seems those sentences are muddled, somehow. Let’s try again. China couldn’t stimulate its property & infrastructure sectors because they are already over-geared, unproductive, full of mal-investment, already on a form of life-support, with many names in the sector still essentially working their way through bankruptcy and recapitalisation, and there’s no opportunities to extend profitable loans to agents that would encourage quality activity, but, at the same time, the economy couldn’t generate decent growth without it.

A catch 22.

This is essentially a (slightly) wobbly argument/analogy of “the growth engine is conked out and there’s not a lot left to keep it going”.

Demographics is (often) destiny, China’s demographics are terrible (as in a top-heavy aging population, with not enough new-borns/population growth) and an old model for success that has now become unreliable, with entrenched social and economic structures that prevent a transition to a new one.

So, commodity prices look like this.

We have a sizeable underweight to resources, in our direct equity sleeves, and no dedicated commodities exposure across our multi-asset funds. Some months, our performance looks great, and you’d think we are doing amazing things under the hood. Other months, we’ve been left behind, and the answer to both is mostly “we worry about China, we worry about global growth, so lets spread the capital around, and not have a big bet on iron ore and copper, and the other cyclical resource-focussed names”.

When BHP alone is more than 10% of the index, that matters, and the materials sector overall is closer to 26% of the benchmark.

Our position in BHP is closer to 3%, almost dead capital at that weight, with a bit of IPL (which is now akin to a cashbox having monetised the Waggaman ammonium nitrate assets at peak prices, which we are delighted about) and AWC (alumina) thrown in. Our positions in NCM were exited on the back of the Newmont bid.

To sum, the positions we have are modest, reflecting our concerns about the worlds largest source of incremental commodity demand, not to mention a slowdown in global growth brought on by tighter monetary policy.

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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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