WEBVTT - Silvercrest's Chovanec: China's Fundamentals Still Poor (Audio)

0:00:00.040 --> 0:00:05.440
<v Speaker 1>From tequila in Mexico to Chinese stocks. Patrick Chavonnick joins us. Now,

0:00:05.559 --> 0:00:09.200
<v Speaker 1>Chinese stocks have been under pressure this year, but some

0:00:09.440 --> 0:00:14.320
<v Speaker 1>news about the MSCI Global Market indexes helped give him

0:00:14.360 --> 0:00:17.759
<v Speaker 1>quite a boost today. Patrick, of course, is chief strategist

0:00:17.760 --> 0:00:22.400
<v Speaker 1>at Silver Crest Asset Management. Welcome Patrick, So what a

0:00:22.480 --> 0:00:25.800
<v Speaker 1>day and that one minute like crash in the Chinese

0:00:25.800 --> 0:00:28.800
<v Speaker 1>stock market? Uh, what do you make? First of all,

0:00:28.840 --> 0:00:34.839
<v Speaker 1>what happened today? And what do you think drove it? Um? Um,

0:00:36.920 --> 0:00:38.639
<v Speaker 1>you got me. He caught me a little bit off

0:00:38.720 --> 0:00:41.760
<v Speaker 1>the Chinese stock market. We had that, we had the

0:00:41.800 --> 0:00:44.920
<v Speaker 1>boost today, We had Goldman Sacks saying it was likely

0:00:44.920 --> 0:00:46.960
<v Speaker 1>the Nation shares would be included in the m s

0:00:46.960 --> 0:00:51.640
<v Speaker 1>c I Global Benchmark Index, the Shanghai Composite up three

0:00:51.640 --> 0:00:54.480
<v Speaker 1>point three per cent, and then of course we did

0:00:54.520 --> 0:00:56.880
<v Speaker 1>have that momentary, that one minute down draft in the

0:00:56.920 --> 0:00:59.400
<v Speaker 1>stock market, which apparently had to do with just some

0:00:59.440 --> 0:01:03.160
<v Speaker 1>of the specul lation around this whole question whether the

0:01:03.240 --> 0:01:05.920
<v Speaker 1>Chinese talks will get him in because this has been

0:01:05.920 --> 0:01:07.920
<v Speaker 1>an ongoing story and I'm glad you filled me in

0:01:07.920 --> 0:01:10.360
<v Speaker 1>on the latest, but this has been an ongoing story

0:01:10.400 --> 0:01:13.240
<v Speaker 1>where last year there was a lot of talk about

0:01:13.440 --> 0:01:17.200
<v Speaker 1>China's stock market domestic shares being added to the m

0:01:17.319 --> 0:01:20.400
<v Speaker 1>s c I index. Uh. It's kind of come around

0:01:20.480 --> 0:01:24.360
<v Speaker 1>again UH this year. UH. And and I was afraid

0:01:24.800 --> 0:01:27.000
<v Speaker 1>from your statement that they had made a decision. But

0:01:27.000 --> 0:01:29.880
<v Speaker 1>but essentially there's just like last year, there's a lot

0:01:29.920 --> 0:01:32.360
<v Speaker 1>of talk that if they do include them in the

0:01:32.360 --> 0:01:37.720
<v Speaker 1>global indices, that this will cause a rush of investors

0:01:38.000 --> 0:01:41.880
<v Speaker 1>into those shares, and so there's a lot of speculation. Um.

0:01:41.880 --> 0:01:44.479
<v Speaker 1>But there's also a lot of downside the China's market.

0:01:44.600 --> 0:01:47.920
<v Speaker 1>You know, they have spent the last year intervening, UH

0:01:47.960 --> 0:01:51.760
<v Speaker 1>in order to keep the Chinese stock market up and

0:01:51.840 --> 0:01:53.920
<v Speaker 1>so UM. So this is kind of a tug of

0:01:53.920 --> 0:01:57.400
<v Speaker 1>war between expectations. Is the market overvalued as a lot

0:01:57.440 --> 0:01:59.880
<v Speaker 1>of people think, I would argue it is, uh, or

0:02:00.000 --> 0:02:03.560
<v Speaker 1>are we just on the verge of a whole bunch

0:02:03.600 --> 0:02:06.600
<v Speaker 1>of new investors coming in? Patrick, I'm wonder if you

0:02:06.760 --> 0:02:08.880
<v Speaker 1>just focused on the United States for a moment and

0:02:09.000 --> 0:02:12.440
<v Speaker 1>tell me some of the concerns that you have over

0:02:12.480 --> 0:02:15.880
<v Speaker 1>the performance of the US economy, beginning with inventory to

0:02:16.040 --> 0:02:20.840
<v Speaker 1>sales ratios. What does that mean and why are you concerned?

0:02:22.200 --> 0:02:26.959
<v Speaker 1>Well over the past year, Uh, we've seen UH, inventories rise.

0:02:27.360 --> 0:02:32.360
<v Speaker 1>UH they as as a relatives to sales. Part of

0:02:32.360 --> 0:02:34.960
<v Speaker 1>that is because sales have been stumbling a little bit.

0:02:34.960 --> 0:02:38.360
<v Speaker 1>We got some good news today, UH with the biggest

0:02:38.360 --> 0:02:43.560
<v Speaker 1>surge in in UM in consumer spending monthly surge since

0:02:43.600 --> 0:02:48.680
<v Speaker 1>the beginning of the beginning of the recovery. But UH,

0:02:48.720 --> 0:02:51.960
<v Speaker 1>this has been an ongoing issue and it's something where

0:02:52.120 --> 0:02:57.120
<v Speaker 1>it's it's a drag on the willingness of of of

0:02:57.520 --> 0:03:01.959
<v Speaker 1>businesses to ramp up output and to stock and to

0:03:02.080 --> 0:03:05.560
<v Speaker 1>stockpile more inventory because they are concerned that they don't

0:03:05.560 --> 0:03:09.919
<v Speaker 1>necessarily with these elevated inventory numbers, that demand so far

0:03:10.000 --> 0:03:14.280
<v Speaker 1>hasn't materialized. So it's not necessarily an indicator of an

0:03:14.280 --> 0:03:18.160
<v Speaker 1>imminent recession. But it is a vulnerability point in the

0:03:18.240 --> 0:03:22.360
<v Speaker 1>US economy. You know, the Fed reserve UM cut back,

0:03:22.760 --> 0:03:26.040
<v Speaker 1>it's dot plot, you know, not four rate hikes in

0:03:26.600 --> 0:03:31.000
<v Speaker 1>two seen just two after all the volatility and global markets,

0:03:31.040 --> 0:03:33.040
<v Speaker 1>particularly in China and the slowdown in China, how far

0:03:33.040 --> 0:03:35.720
<v Speaker 1>it would go the yuan continues to weakend, this is

0:03:35.760 --> 0:03:40.000
<v Speaker 1>a real big story in China. What how does China

0:03:40.040 --> 0:03:42.080
<v Speaker 1>look to you? Because that's another reason why the stock

0:03:42.080 --> 0:03:43.839
<v Speaker 1>market is under pressure. But when you see a jump

0:03:43.880 --> 0:03:46.160
<v Speaker 1>like today, I think after the stock market gets beaten

0:03:46.200 --> 0:03:49.280
<v Speaker 1>up in China, you think maybe it's time to hop in.

0:03:49.400 --> 0:03:52.080
<v Speaker 1>I think you're saying it isn't. Yeah, I think you've

0:03:52.080 --> 0:03:56.440
<v Speaker 1>got to separate, um, the fundamentals of the Chinese economy,

0:03:56.480 --> 0:03:59.360
<v Speaker 1>which continue to slow despite there was a lot of

0:03:59.360 --> 0:04:02.040
<v Speaker 1>talk just in past couple of months about that China

0:04:02.040 --> 0:04:05.080
<v Speaker 1>would pouring more stimulus and that Chinese economy would turn around.

0:04:05.120 --> 0:04:09.640
<v Speaker 1>I think there's a gradual realization that that has not happened. Uh,

0:04:09.840 --> 0:04:12.800
<v Speaker 1>that that more credit is not really helping to boost

0:04:12.800 --> 0:04:16.760
<v Speaker 1>the Chinese economy. Uh. So you've got the fundamentals which

0:04:16.800 --> 0:04:20.360
<v Speaker 1>are poor and perhaps getting worse, and then you've got

0:04:20.360 --> 0:04:24.680
<v Speaker 1>sort of the speculative angle, uh that that, uh, are

0:04:24.680 --> 0:04:27.359
<v Speaker 1>they going to suddenly open the floodgates and it's going

0:04:27.440 --> 0:04:29.440
<v Speaker 1>to cause a lot of people to rush in. But

0:04:29.600 --> 0:04:32.839
<v Speaker 1>remember a year ago, the same conversation was taking place

0:04:33.480 --> 0:04:39.280
<v Speaker 1>MSc I chose not to include them, and that I

0:04:39.320 --> 0:04:42.799
<v Speaker 1>think was that that really was kind of the peak

0:04:42.960 --> 0:04:46.640
<v Speaker 1>of the bubble in China. And what happened was, uh,

0:04:46.680 --> 0:04:48.840
<v Speaker 1>there was a shift from oh, all this money is

0:04:48.839 --> 0:04:51.320
<v Speaker 1>going to flow into a free focus on fundamentals, and

0:04:51.320 --> 0:04:53.760
<v Speaker 1>then the bottom fell out of the market when they

0:04:53.800 --> 0:04:57.279
<v Speaker 1>focused on those fundamentals. So, you know, I think people

0:04:57.320 --> 0:04:59.839
<v Speaker 1>need to get people need to be worry about getting

0:04:59.839 --> 0:05:03.359
<v Speaker 1>ca up in the hype of China being added to

0:05:03.400 --> 0:05:06.800
<v Speaker 1>the MSCI Index as though that somehow changes the trajectory

0:05:06.800 --> 0:05:09.920
<v Speaker 1>of the Chinese economy, which it doesn't. Patrick What about

0:05:09.920 --> 0:05:14.840
<v Speaker 1>the trajectory of emerging markets such as Vietnam, Indonesia, Malaysia,

0:05:15.400 --> 0:05:18.839
<v Speaker 1>those countries that depend in some symbiotic way on what

0:05:18.920 --> 0:05:22.360
<v Speaker 1>goes on in China really depends on what the relationship

0:05:22.480 --> 0:05:27.360
<v Speaker 1>is with China. Some of them, uh, our feeding China's

0:05:27.400 --> 0:05:31.400
<v Speaker 1>investment boomer have fed China's investmentment. For instance, Indonesia exporting

0:05:31.440 --> 0:05:35.080
<v Speaker 1>coal to China that has been hit very hard. Uh.

0:05:35.200 --> 0:05:37.560
<v Speaker 1>But there are other ways where they compete with China

0:05:37.760 --> 0:05:42.240
<v Speaker 1>and so Vietnam for instances, the potential potentially benefits from

0:05:42.279 --> 0:05:44.720
<v Speaker 1>some of the difficulties that the Chinese economy is having

0:05:44.800 --> 0:05:48.760
<v Speaker 1>right now. And in terms of emerging markets more broadly,

0:05:48.920 --> 0:05:51.080
<v Speaker 1>you know, we like to throw everything into a bucket

0:05:51.080 --> 0:05:53.680
<v Speaker 1>of emerging markets. Say which way are emerging market is

0:05:53.720 --> 0:05:57.040
<v Speaker 1>going to go? Are they better worse? Bet than developed markets.

0:05:57.080 --> 0:05:59.240
<v Speaker 1>But the list that you know, the list that you

0:05:59.480 --> 0:06:02.000
<v Speaker 1>ran off and we could make it a much given

0:06:02.040 --> 0:06:04.440
<v Speaker 1>longer list kind of highlights the fact that we're not

0:06:04.480 --> 0:06:08.080
<v Speaker 1>talking about a single story here. We're talking about different

0:06:08.120 --> 0:06:12.640
<v Speaker 1>stories some of these some of these economies are commodity producers,

0:06:12.640 --> 0:06:16.000
<v Speaker 1>some of them are our commodity importers. Some of them

0:06:16.040 --> 0:06:18.840
<v Speaker 1>are moving forward with reforms, some of them are backtracking.

0:06:19.200 --> 0:06:22.440
<v Speaker 1>Some of them are tied to China and China's investment booms.

0:06:22.440 --> 0:06:24.400
<v Speaker 1>Some of them are tied to Europe. Some of them

0:06:24.440 --> 0:06:26.560
<v Speaker 1>are tied in like Mexico, to the United States. So

0:06:26.560 --> 0:06:30.080
<v Speaker 1>we thank you very much. Patrick Chauvanick. He is Managing

0:06:30.080 --> 0:06:33.520
<v Speaker 1>director's Chief Strategists, Silver Crest Asset Management