China's Crash: Postponed

August 22, 2014

Contrary to popular belief, China is not necessarily headed for disaster.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Tyler Mordy, president and co-chief investment strategist of Toronto-based Hahn Investment Stewards.

Sophia Loren once said that “mistakes are part of the dues one pays for a full life.” In the world of investing, as in life, the trick is not to repeat the same ones.

Yet investors seem to make similar missteps with disheartening regularity. Even the well-staffed professional portfolio manager labors under a long list of occupational hazards: the seductive lure of linear extrapolation, the itchy trigger finger and, of course, the vicelike grip “group think” effortlessly secures on the collective conscience.

Where might the above mistakes be occurring today? China may be one. The bulls (if we may speak for the handful of them still holding their day jobs) are seemingly near extinction. China bear sightings are much more common.

The gloomy case is widely known. Overleverage, overbuilding and overcapacity plague the economy. Return on investment for the state sector is in chronic decline and residential home prices remain elevated. On top of that, a large, opaque "shadow banking system" poses a systemic risk to the entire credit system.

We get it. China comes with risks.

The problem is that a crash this widely advertised rarely shows up. Financial markets have already priced in a significant slowdown. China’s onshore A-share market is down more than 50 percent since its 2007 peak. Despite being voted the “most groundbreaking new ETF of 2013” at ETF.com’s annual awards dinner, the Deutsche X-trackers Harvest CSI 300 China A-Shares (ASHR | D-51) has only gathered about $310 million in assets.

China_A_Shares_Returns

Let’s separate fact from fiction.

 

 

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