September was something of a disappointment again for equity investors, although I think it could have been much, much worse. According to analysts at S&P Dow Jones , their aggregate measure of major markets posted its first decline (-4.08%) since January 2021 (-0.21%), and its worst month since March 2020 (-14.61%).

Interestingly, for the first time in ages, the US markets underperformed with global breadth strongly negative.  For the month, global markets declined 4.08% and without the U.S.’s -4.63%, the decline was -3.34%, after August’s 2.35% gain and 1.84% without the U.S.’s 2.73% gain.  For September, 19 of the 50 markets gained, down from August’s 44, July’s 25, June’s 20, and May’s 36.

The table below shows some of the out performers – led by Russian equities. Who’d have guessed, followed by the Czech Republic and Qatar. Where’s the natural gas in the Czech Republic ? As for laggards, I’d draw attention to the two populist hotspots, Turkey and Brazil. The former s now down nearly 20% this year (all those gas imports) and the latter is down over 15% (lots of natural gas !).

Oh and sticking with Brazil, I thought this was interesting: from Charlie Robertson at EM specialists renaissance. “Despite the plunge in iron ore prices this year, we still have v strong exports growth up 33% YoY in September (and this isn’t just base effects, exports in Sept 2020 were only down 2% YoY).  But imports were up a hefty 52% (this was partly base effects, Sept 2020 was -14% YoY). For Brazil itself – it’s supportive of the view that domestic demand is recovering well.  The record nominal 12-month trade surplus of $67bn to August 2021 slipped to $66bn – which ought to be strong enough to be very BRL supportive.  Yet the BRL is still the second cheapest EM currency, 26% weaker than its own long-term average in our REER model (that average is 4/$ vs the spot 5.4/$).”

I’m willing to concede that Turkey has a major balance of payments issue but Brazil ??

Sticking with the that equities theme, as I said I thought September was going to be much bumpier than it was. My own thinking is summed up nicely by Charles Ekins of Guinness Ekins who a few days ago warned that “Equities On the Cusp of Danger, based on the simple fact that valuations look ‘very stretched’.  Crucially, looking at the chart below, equity markets “are now losing momentum…Equity Markets are still in a bull phase but downside risks are becoming a major concern. Our model is waiting for confirmatory signals, but is very close to reducing Equity allocations due to value risks and loss of momentum”. The bulls feel like they’ve run out of energy.

One market that has definitely run out of bullish momentum is China. I’m having a difficult time reconciling the fact that China is making all the WRONG noises at the governance and policy level with the continued enthusiasm of asset managers and institutional capital.

A prime exhibit of this in Invesco’s latest ‘China Position’ research available HERE. This suggests that many big institutions are actually keen to INCREASE their exposure to China. This, I think, is a classic example of cognitive dissonance. Sure, rationally China is a huge market. And sure China represents huge opportunity. More to the point, Chinese exposure’s do probably need to rise on an asset weighted basis within portfolios to account for that economic heft. But come on ladies and gentlemen you cannot ignore the very clear policy signals emerging ?! Or can you.

Anyway amongst the highlights of the Invesco report, I’d focus on the following:

• 86% of respondents say they’ve either maintained or grown their China exposure over the past year, with 64% expecting further increases over the coming year. Only 12% reported a reduction in their China exposure.
• Covid-19 has increased the risk appetite of more than half of survey respondents with regards to their China exposure in the past year.
• Drivers of investment in China are a mix of market factors, such as improvement in the quality of financial intermediaries within China; expectations of the growth and expansion potential of China’s economy or of listed-company profits; as well as internal factors such as improvements to an organization’s own China expertise.
• The majority of survey respondents (62% always or often adopt ESG investing with their China exposures, and two-thirds say their China exposure has increased significantly/ somewhat due to their ESG goals.
• Approximately one third of survey respondents plan increases to each asset class, with the highest numbers in real estate 40%, direct ownership of companies 39% and alternatives 38%.

MMmmhhh! Increasing your exposure to China based on ESG criteria. I’m not sure that quite computes. But, hey, what do I know.