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

you got me. He caught me a little bit off

the Chinese stock market. We had that, we had the boost today, We had Goldman Sacks saying it was likely the Nation shares would be included in the m s c I Global Benchmark Index, the Shanghai Composite up three point three per cent, and then of course we did have that momentary, that one minute down draft in the stock market, which apparently had to do with just some of the specul lation around this whole question whether the Chinese talks will get him in because this has been

an ongoing story and I'm glad you filled me in on the latest, but this has been an ongoing story where last year there was a lot of talk about China's stock market domestic shares being added to the m s c I index. Uh. It's kind of come around again UH this year. UH. And and I was afraid

from your statement that they had made a decision. But but essentially there's just like last year, there's a lot of talk that if they do include them in the global indices, that this will cause a rush of investors into those shares, and so there's a lot of speculation. Um. But there's also a lot of downside the China's market. You know, they have spent the last year intervening, UH in order to keep the Chinese stock market up and so UM. So this is kind of a tug of

war between expectations. Is the market overvalued as a lot of people think, I would argue it is, uh, or are we just on the verge of a whole bunch of new investors coming in? Patrick, I'm wonder if you just focused on the United States for a moment and tell me some of the concerns that you have over the performance of the US economy, beginning with inventory to sales ratios. What does that mean and why are you concerned? Well over the past year, Uh, we've seen UH, inventories rise.

UH they as as a relatives to sales. Part of that is because sales have been stumbling a little bit. We got some good news today, UH with the biggest surge in in UM in consumer spending monthly surge since

the beginning of the beginning of the recovery. But UH, this has been an ongoing issue and it's something where it's it's a drag on the willingness of of of businesses to ramp up output and to stock and to stockpile more inventory because they are concerned that they don't necessarily with these elevated inventory numbers, that demand so far hasn't materialized. So it's not necessarily an indicator of an imminent recession. But it is a vulnerability point in the

US economy. You know, the Fed reserve UM cut back, it's dot plot, you know, not four rate hikes in two seen just two after all the volatility and global markets, particularly in China and the slowdown in China, how far it would go the yuan continues to weakend, this is a real big story in China. What how does China look to you? Because that's another reason why the stock

market is under pressure. But when you see a jump like today, I think after the stock market gets beaten up in China, you think maybe it's time to hop in. I think you're saying it isn't. Yeah, I think you've got to separate, um, the fundamentals of the Chinese economy, which continue to slow despite there was a lot of talk just in past couple of months about that China would pouring more stimulus and that Chinese economy would turn around.

I think there's a gradual realization that that has not happened. Uh, that that more credit is not really helping to boost the Chinese economy. Uh. So you've got the fundamentals which are poor and perhaps getting worse, and then you've got sort of the speculative angle, uh that that, uh, are they going to suddenly open the floodgates and it's going

to cause a lot of people to rush in. But remember a year ago, the same conversation was taking place MSc I chose not to include them, and that I think was that that really was kind of the peak of the bubble in China. And what happened was, uh, there was a shift from oh, all this money is going to flow into a free focus on fundamentals, and then the bottom fell out of the market when they

focused on those fundamentals. So, you know, I think people need to get people need to be worry about getting ca up in the hype of China being added to the MSCI Index as though that somehow changes the trajectory of the Chinese economy, which it doesn't. Patrick What about the trajectory of emerging markets such as Vietnam, Indonesia, Malaysia, those countries that depend in some symbiotic way on what goes on in China really depends on what the relationship

is with China. Some of them, uh, our feeding China's investment boomer have fed China's investmentment. For instance, Indonesia exporting coal to China that has been hit very hard. Uh. But there are other ways where they compete with China and so Vietnam for instances, the potential potentially benefits from some of the difficulties that the Chinese economy is having right now. And in terms of emerging markets more broadly, you know, we like to throw everything into a bucket

of emerging markets. Say which way are emerging market is going to go? Are they better worse? Bet than developed markets. But the list that you know, the list that you ran off and we could make it a much given longer list kind of highlights the fact that we're not talking about a single story here. We're talking about different stories some of these some of these economies are commodity producers,

some of them are our commodity importers. Some of them are moving forward with reforms, some of them are backtracking. Some of them are tied to China and China's investment booms. Some of them are tied to Europe. Some of them are tied in like Mexico, to the United States. So we thank you very much. Patrick Chauvanick. He is Managing director's Chief Strategists, Silver Crest Asset Management