Mordy: DSUM Bucks Bond Trend

November 19, 2013

Yield Of Dreams?

To be sure, the RMB and dim sum bonds are not a one-way bet. This year, with wider emerging market risk aversion, issuance has been driven by Chinese financials and not Western corporations (which arguably carry better credit quality). And, of course, China’s economic success is not guaranteed.

The above risks are valid. Deep skepticism remains large. And China’s growth is finally slowing. Its average annual GDP growth rate was 10 percent from 2002 through 2011. That era is now over.

Growth will almost surely moderate as a consequence of economic rebalancing (as investment declines as a share of GDP, from a very high level), reduced scope for productivity gains (as incomes rise and the pool of cheap labor from rural areas dries up) and demographic changes (as the country’s labor force peaks).

Yet calling for China’s collapse is overhyped. What is collapsing is China’s former neo-mercantilist economy of selling cheap goods to the West.

The new economy is focused on industrial upgrading and increased domestic consumption. This transition will require a move away from a reliance on U.S. funding and settlement. Recent figures are encouraging. In 2010, only 3 percent of China’s trade was transacted in renminbi. Last year, that figure had risen to more than 15 percent.

Conclusion: Go The Distance

This is our first article in what will be a longer-running series. It may seem strange that we have chosen dim sum bonds—an esoteric part of the investing universe—as our opening shot.

But this topic precisely gets to the heart of macro ETF investing. It isn’t about trading the latest hot stock. It’s about spotting big-picture trends—anticipating the next “field of dreams”—before they emerge into the mainstream.

The great promise of building ETF portfolios this way is broader diversification, better risk management and not remaining hostage to traditionally rigid asset-allocation approaches, which have fared poorly in recent years.

ETF strategists understand this. We may not be hearing voices from dead baseball players, but we are earnestly building structures for a better way of investing.

It’s early days, but investors are already showing up.


¹Data according to SWIFT

²Jakarta Post, “Renminbi towards internationalization,” Nov. 4, 2013

³See GaveKal Research, “Our Currency and Your Problem,” Sept. 26, 2012

Tyler Mordy, president and co-chief investment officer of Hahn Investment Stewards, is a recognized innovator in the design and application of global macro ETF managed portfolios. He is widely interviewed by the financial media for his global investment strategy views, as well as ETF trends. CNBC has called him one of the “best independent ETF experts.”

Contact Tyler at [email protected]


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