Louis Vincent Gave, manager of Gavekal Asian Opportunity is one of the most interesting manager to listen to. And he is worried.
There is a clear dichotomy between the Emerging Markets and there are only three potential reason/outcomes
1 The first is to say that the tailwinds to the Western economies (shale gas, robotics, ultra-easy monetary policies, fiscal and
regulatory policy visibility…) are just so strong that the valuation gap between emerging markets and developed markets
can only accelerate from here. In this scenario, one would want to continue buying developed market equities at the
expense of almost anything else.
2 The second is to say that, if developed economies really start growing as fast as Western equity markets are increasingly
starting to discount, then one should not worry too much about a China slowdown. Instead, one should use the recent sell-off
in EM growth stocks as a terrific opportunity to increase exposure to Asian and emerging market equities on the cheap.
3 The third, and more worrying conclusion would be that, while emerging markets are rightly discounting a growth slowdown,
developed markets are not, probably because of the excess liquidity created by central banks. However, if/when the spigots
get tightened and/or growth in developed markets is unable to build on the recent momentum, then the valuation gap
might close not through a re-rating of emerging market equities, but a de-rating of developed markets.
It is this third possibility that has GK worried today. Indeed, with a US economy approaching “stall speed” (whenever US GDP and US
industrial production growth fall below 1.5% YoY, the US economy has always experienced a recession), with growing uncertainty
regarding US monetary policy, with the threat of partisan budgetary battles looming once again in Washington, with Southern Europe remaining stuck in a deflationary bust… a number of factors pushed GK to reduce the overall risk across most of the actively managed GaveKal funds in July. This was obviously not the best immediate decision and helped contribute to the past month’s under performance.
So there are two outcomes …or he is wrong or he simply acted to early. This kind of dichotomy is statistically 70% associated with a crisis.
As of me, my personal scary month is mainly September and part of October – I am very traditional guy indeed 🙂
investorpolitico 