Friday, July 10, 2015

Ray Dalio Isn’t Terribly Concerned About What’s Happening In China

Ray Dalio's argument on China's market movements

He makes the argument that China’s market movements are not significantly reflective of, or influential on, the Chinese economy, nor are they extremely impactful on investors in China and abroad. Instead, what is currently happening is typical for a newly developing equity market that is dominated by what he calls “unsophisticated speculators.”
He writes:
A lot of people think that the direction of a stock market is indicative of the direction of an economy. That is because a) the prices of stocks normally reflect the conditions of the companies, and the mix of stocks reflects the economy; and b) changes in stock prices have a wealth effect that affects economic activity. As we will show in this Observations, that is much less true for China than for other countries. That’s because 1) the liberalization of the financial system and all that is going on is not connected to the growth rate and normal economic linkages, and 2) the complexion of stocks is not representative of the economy. As a result, China can have a bull market or a bear market at the same time it has the opposite behavior in its economy. So don’t bet on those linkages.
The Chinese equity market has experienced an enormous meltdown in recent weeks, losing about a quarter of its value since peaking in mid-June. Hundreds of stocks have halted trading.
Chinese authorities have taken increasingly drastic measures to prop up shares. The government has lent billions of dollars to brokerage firms to buy blue chip stocks, put a stop on IPOs and barred controlling shareholders and board members from selling for six months.
Onshore Issuance by ExchangeAnalysts at Societe Generale offered an analysis of the Chinese government’s actions in a note on Thursday. “While the Chinese government continues to battle with the falling stock market, we are concerned that asking big financial situations to catch the falling knife is not helping lower systematic risk,” they wrote. They added that as more measures are taking in the coming days, they believe the policy focus should be on the real economy and the general liquidity level in the overall financial system.
Ray Dalio's assessment puts focus on equities in the context of the greater economy as well.
The billionaire hedge fund manager points out in the July 2 publication that the recent fall in the Chinese stock market has been small in relation to its gains. “The recent 20% decline in the A-Share market came after the 140% prior rise that has occurred since last summer,” he writes. “The vast majority of the price moves have been driven by changes in stock multiples, while corporate earnings have gradually glided higher over the past few years.”
Also driving the Chinese market higher has been the increased participation of new and inexperienced retail investors. Around two-thirds of those opening new brokerage accounts in recent year have less than a high school education.
The explosion of unseasoned investors in the market contributes to volatility, and as Ray Dalio points out, many will get burned as prices rise and fall.
Adding fuel to the fire is the fact that larger, more sustainable buyers have not yet participated significantly in Chinese equities. Ray Dalio writes:
In the process of developing China’s equity market, policy makers are moving to broaden institutional participation, both by opening up their markets to foreign participation and also strengthening domestic institutional savings pools. But we are still early in the process and, at this stage, institutional participation by both foreign and domestic institutions is still limited.
China Equity Market PE by sector redo
And while China has been making reforms in order to open up its domestic markets to foreign institutional investors, it still has a long way to go.The Chinese stock market appears to be in a perilous situation, but Ray Dalio holds that its linkage to the actual economy is limited. Simply put, the role of the country’s equity market in the economy is still low, as evidenced by a number of measures.
“Equity market development and liberalization are happening independent of one another, so the changing nature of flows in the equity market and the gyrations in return aren’t necessarily representative of what’s going on in the economy, like they might be in a more developed market,” Ray Dalio writes.
For instance, the sector composition of China’s equity market departs from what is happening in its actual economy (for example, financials are more heavily represented in the market than in the overall economy). Moreover, the equity market is a picture of what Ray Dalio calls the “old economy,” which is dominated by state-owned enterprises and industrials, instead of new, high-growth emerging sectors that have increasing economic importance.
Ray Dalio also notes that Chinese households remain underexposed to equity markets and instead have much higher holdings of cash when compared to more developed markets. In other words, the equity market’s plunge isn’t hitting the Chinese people as hard as it would their counterparts in other parts of the world.
While the situation in China is certainly worth monitoring, according to the Bridgewater Associates team, its impact should be entirely manageable both domestically and abroad.
Ray Dalio notes that equity holdings in China are only about 20% of the country’s GDP. The government and corporations own the majority of the market cap, and their spending is typically less sensitive to wealth and stock prices. “Since household equity positions are so much smaller than is typical, the wealth effect will work differently and be much more modest than one would expect in more developed markets, where equity holdings are more significant in size,” he writes.
Household Equity Holdings
Equity Market Ownerships-china-bridgewater
He adds that the ripple to the global economy is also likely small:
We are just at the beginning of the process of opening up Chinese capital markets to the world, and global investors’ positions are still relatively modest in the context of overall global equity portfolios, especially for A-Share positions that have had most volatile market action.
Bridgewater Associates representatives declined to comment.
Bridgewater Pure Alpha Strategy 12
Ray Dalio Bridgewater Associates All Weather 12 Strategy Performance Final
Ray Dalio Bridgewater Associates All Weather 12 Strategy Performance Final

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.