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Insight - Making Sense of the Narrative


With an upcoming Camp David meeting with US 'allies' in Asia and the BRICS meeting in South Africa, the narrative on China was always going to take a more negative tone. Investors need to recognise that while in the short term narrative managers may dominate, in the longer term cash flows count. China's troubles are not new, but nether are they anywhere near as bad as presented; exports are slowing, but still 40% up on pre Covid levels, while GDP growth is still 3x the US and 10x Europe. China offers both opportunities and threats, but what it doesn't offer is the opportunity to ignore it.

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July saw markets broadening as recognition that the second leg of a bear market is unlikely to appear became more widespread and fears of a recession receded. Shorter duration areas such as energy, mining and financials began to catch up with the megacap tech stocks. While retail may be too bullish, institutional investors are heavily short equities and long cash, a position that is not sustainable in the long run. The wobble in bond markets in early August may have more to do with 'the beginning of the end' of yield curve control in Japan than any US fundamentals, but will doubtless keep cash as a crowded trade in bond markets for the time being. Meanwhile, politically inspired narratives against China should not fool investors that they can ignore the impact of China on economies as well as markets; martial threats may be exaggerated, but competitive ones are very real.