I hope you didn’t waste too much time staying up last night in expectation of a Biden victory or a Blue sweep through the Senate! I know it’s not over yet but looking at the numbers coming out of Pennsylvania, Michigan, and Wisconsin, I wouldn’t hold your breath for Biden. Maybe he might stage a late rally from postal votes, but even if he does win, his legislative agenda will now be strangled to death by a Republican Senate – remember that Susan Collins in Maine survived a massive rush of Dem money. I make no bones about preferring the Democrat, but I think the liberal left in the US has to face up to some awkward truths. It lost the white working-class again, the whole BLM agenda and the riots scared the living daylights of many voters, plus a large chunk of Latino men sided with Trump.  Sprinkle over a real fear of Socialists and then mix in a strong US economy prior to Covid and game over. I had thought that Covid might lose Trump a whole heap of older voters, but it seems like I was mistaken.

Anyway, if we are to use the chart of possible economic outcomes suggested by analysts at CheckRisk from my blog on Monday, we should expect more fiscal stimulation but probably less in infrastructure and green stuff and more via monetary stimulus. I actually think this is a net plus for equity markets. But hey what do any of us know – although one thing I think we can confidently say is not to trust to pollsters anymore.

Sticking with this American theme I noticed this interesting chart in the latest monthly report from Arbrook’s US fund, which seems to be doing a good job of outperforming the US index (no mean hurdle). The chart below shows the (complex) interrelationship between US 10 year bond yields and the ratio of copper relative to gold. The obvious mini-cycles “have been a recurring feature of the US economy over the last decade and at the bottom of one we may now be. Indeed, copper has been particularly strong since the depths of the pandemic lockdown6 and we believe is a reasonable indicator for the direction of the global economy”.

Repeat – Trump wins and the Republicans stay in charge of the Senate, makes the reflation trade more likely.

China Tech Inc, redux

Equities fund Manchester and London has been slowly emerging on my radar as a way of buying aggregated exposure to the worlds leading global scale tech players. It has a different approach to say Scottish Mortgage, notably with much less unlisted exposure.

If you want to find out more about the fund you can see its newsletter HERE.

Manager Mark Sheppard has a fair old chunk of how own (and his families) money in the fund and has developed a fairly well articulated world view about why Tech is so interesting. But its latest newsletter has what I think is a thoroughly compelling narrative about the rise of China Tech Inc. I think I pretty much agree with everything that follows and it also fits nicely with the narrative I outlined last Friday from the Paulson Institute.

The story starts with the inevitable domestic crackdown with ever more universal surveillance and stifling of internal debate. In this scenario, Hong Kong is stuffed. For Sheppard the Investment conclusion is stark: “Western companies with large Hong Kong operations should be avoided (HSBC, Jardine).” Investors should also keep a watchful eye on the new digital currency promoted by the Chinese Central Bank  which will reinforce the evident social deal between the Chinese and the CCP “Good citizens will get a great life and access to loans and investments which will be facilitated through the likes of Tencent and Ant Group which will allow them to spend freely (through Alibaba) on achieving a middle-class lifestyle. “

The investment conclusion? “It is in the interest of the CCP that the social deal is delivered to the people of China and Tencent, Alibaba and Ant Group are the tools of operation.” One observation – according to a note this morning from Numis, Manchester and London has one of the highest exposures (over 10% according to Numis) to Alibaba, which might not be a great place to be this week.

Next, we come to Taiwan.

The manager expects China to “expend massive monetary sums to place Taiwanese who have been “influenced” by the CCP into positions of power.  Social media and soft power will wash over Taiwan to change the narrative from within” . If that doesn’t work – which I doubt it will – then we’ll have an “arranged coup d’etat which will exhibit the first military war that will be predominantly won using software and high technology rather than humans with traditional weapons”.  Investment conclusion: “we have not/will not invest in Taiwan’s excellent technological hardware sector”.

This is the one part of the narrative I don’t entirely buy into as I think the locals will resist all these efforts and the Chinese really won’t push the military window too aggressively.

Fanning out into the wider region, China will re-assert its traditional ‘overlordship’ over the region and then “ push their digital technology at highly subsidized rates throughout the region until such countries are effectively digitally controlled by the Chinese empire….Once your IT & communications network that manages your financial, health, and food logistics systems and the utility grid are under the control of the Chinese have no doubt you have become their vassal. “

I think this is spot on and presents a huge challenge for the likes of Vietnam and Japan. I’d expect the former to eventually toe the (party) line while the latter becomes more aggressively nationalistic.

But the real core of the global challenge is the massive scientific arms race underway. I’ve discussed this before, and I think it is a huge deal changer. China wants to be number 1 in a whole bunch of spaces and everyone else will have to spend a fortune to keep up. Back to the fund managers take – “It is going to become increasingly hard for the USA to hold back the tide of Chinese Tech when offered to such nations when its quality is ever-improving and its pricing is very heavily subsidised.  China is graduating 1.3m STEM students annually vs 0.3m in the USA with China graduating 185,000 Computer Sciences students annually vs 65,000 in the USA.  How can it conceivably compete in the future if this continues?”

The key passage for me, highlighted in bold, is as follows: “China has an army of technically educated people, a low cost production base being driven increasingly by sophisticated automation (which Western unions will not allow) and they have a government determined to win and subsidize their national champions to outcompete the Western competition until they get majority market shares.  The story will be repeated across semiconductors, network infrastructure, electronic goods and pharmaceuticals and social media.  Those that try to put brakes on their advances will be punished with incarceration of citizens (Canada) and buying strikes (Australian wine and grains, German pork and Norwegian salmon).”

I couldn’t agree more! We need a proper League of Democracies and we need it now.

And the investment conclusion? According to Sheppard,” the ASEAN region will end up dominated by China and those Western companies that continue to invest materially in these regions are dooming themselves to low to zero ROICs.  In time Alibaba, Tencent and Ant will acquire local operators like Grab (or crush them) and dominate the region. With the expansion of their operations across China and ASEAN coupled with fast growing Personal Income for their users we see all three of Alibaba, Tencent and Ant trebling their sales in the next five years providing some of the most compelling investment opportunities in the world.”

In a sense, the payoff is obvious and again one I have also articulated. The technology-driven rise of China might be good for Western investors who will be offered huge returns for investing in China’s rise to superpower status. Remember, China still needs our capital!

Two last quotes which I think are dismally true.

The first is from Sheppard: “The CCP has worked out it does not need to risk a war to win the capital of the West, it will get it anyway.”

The second is from Ray Dalio: “Empires rise when they are productive, well educated, work hard and behave civilly.  Objectively compare China with the USA on these measures…”.

Western investors need to figure out whether they are happy to fund China’s rise to superpower status (echoing the massive investment the Brits made in the rise of the US and Germany pre-WW1). Do we ignore it and turn inwards, or do we increase exposure to China and Tech? My emotional side says we should avoid China, but my coldly rational side says we need greater exposure to China Tech.