Bill Miller, Chief Investment Officer
“It’s not nice to fool Mother Nature” was the slogan used by Chiffon margarine, manufactured and trademarked by Anderson, Clayton and Company in the 1970s. It’s a catchphrase that is somewhat still indicative of the current market weakness in that China is meddling too much with its markets and currency.
Global risk assets are wrestling with the issue of “price discovery.” China is in the headlines for fooling both with its stock market and its currency. To speak as the Federal Reserve, this is probably not a “transient” problem.
The bar chart below titled, “China’s Stocks Still World’s Most Expensive after Rout,” indicates that the median Chinese stock is two to three times more expensive than other stocks globally. Such a large gap begs the question—are Chinese stocks worth it? Doubtful. China has a slowing economy, overvalued currency, overcapacity in many industries, and a lot of debt.
Last August, when we saw headlines such as “China meddling in stock market seen discouraging return of foreign funds” (Reuters – Aug 6, 2015), “China’s market meddling could do more harm than good” (CNN Money – July 28, 2015), and “China’s stocks keep falling because of government’s inept meddling” (INVESTORS.com – August 26, 2015), some of us wondered if we had just seen a preview of the future.
This week’s action seems to indicate, “yes.” China closed its stock exchanges twice and injected money at least once this week did little. On January 7, China also lifted its restriction imposed last summer on sales of shares held by large institutions. Now, investors have no idea what Chinese equities are worth. Price discovery will likely take time there.
All of this, of course, leads us to sovereign bond markets around the world, most notably in the U.S., Europe and Japan. Central banks in these three developed economies have kept interest rates near zero for years now.
The European Central Bank appears increasingly willing to double down on this bet.
No doubt “fooling with Mother Nature” lurks in the minds of many investors. It is hard to fathom paying the government to save your money; but, that is exactly what German investors do when they purchase two-year German Treasury bonds at a -0.375% yield! Just think of all the retirees around that world that have been forced out of safe government bonds and bank certificate of deposits into higher-yielding riskier investments because they need income. There is a popular acronym for this forced behavior, TINA–There Is No Alternative.
To help quell this thought inside investor’s minds, check out Five Answers for the Voices in Your Head.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.