China flags cracks in global equity rally

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Chinese property the 'canary in the coal mine'

Hello, I'm Angeline Ong and welcome to IG's Trading the Markets. We're here to discuss the outlook for the global market landscape in the second half. This is Charlie Morris, founder and chief information officer (CIO) of ByteTree.com.

AO: Charlie, thank you so much for taking time out from your summer and joining us. We've had all this weaker-than-expected data out of China; markets wilting on the back of that. What does this tell you about the second half and how should investors be positioned?

CM: I think this is a continuation of what we saw last year. You know, we had this collapse in China. It became very well known. Credit conditions were pretty bad towards the year end. But then we all got excited by the end of lockdown, the Chinese reopening, which was after everyone else's.

But it proved to be a bit of a damp squib. So I think that the Chinese macro has been very obvious last year. We were expecting great things, but the recovery never came. So basically, Chinese property continues to be in a fair market and it probably is a canary in the coal mine. We shouldn't probably see it in isolation.

Older population may cut youth unemployment

AO: What do you make of the fact that they decided not to break down unemployment by age as well? The 16-to-24 category has seen unemployment far above the overall jobless rate. Do you think this is just a data point, or is it something that's more alarming?

CM: Well, I mean, it's not something I'm particularly familiar with. But I have to say that whenever the data releases change, there's always something behind it. Whether it was the US with publishing the M3 data about 10 years ago or whether it's youth unemployment...

But I gather there is a bit of a problem over there with youth unemployment. And, you know, it's terrible. So I suppose with an aging population, you know, one day that ought to sort itself out.

I think the clear and present problem really is the fact that they've been lending money to property sectors for years, and there's excess supply, and many of these aren't lived in.

AO: Now, Charlie, I've been speaking to money managers from Shard Capital to those that watch fund flows in Square Mile, and Lipper as well. Many of them saying that there is a correction just around the corner. Are you in this camp, or do you think we might still continue with this slow grind upwards in the second half?

Are the Americas a safe bet?

CM: I would think I'm in the correction camp, mainly because this thing is so stretched. There's just so many relationships that are out of kilter. You know, real interest rates, we saw them go up from very, very low levels two years ago, but they're now getting to pretty high historic levels, and that's going to really start to put the squeeze on.

I think the mystery of the last 12 months particularly is that we've had the most forecast recession in history that hasn't arrived. So normally recessions are a surprise to some degree, but this one's been forecast by every single economist who ever lived, and it hasn't materialised.

So that's a strange old thing, but I think it's because conditions, credit conditions were so easy two years ago. In 2020, 2021, with all that money printed, the credit conditions were so easy, and they've only gone back to sort of somewhere we'd call normal.

They haven't actually become tight yet, but as they carry on hiking, or even if they stop hiking, they'll end up being tight by the year end. So I think the pressure's on, and people are just looking for crazy reasons to do things.

And so, this side of the world - Europe, Asia - is basically the troubled side of the world. The other side of the world - with the Americas - that's the safe haven.

AO: Now, you've obviously seen these cycles many times in your own current role, and also in your previous roles as head of absolute return fund at HSBC. What are you looking for when timing when and which assets to either exit or enter?

CM: At the moment, there aren't many attractive alternatives to the simple things, because what we've got are these extraordinary real interest rates, which are very high. That's putting downward pressure on the stock market.

AI bubble growing in the market

There are large swathes of the stock market that don't make any sense. There are bubbles forming in parts of the stock market, for example, AI and so forth. And so, where are the safe havens?

And it's increasingly looking like cash, and that's one of the problems, that more and more people realise that having a higher cash weight is the right thing to do because you get a reasonable payout on it, even though it may be below inflation in the short term.

The pressures are building. And so I think being relatively defensive makes sense. Even gold is starting to feel the heat from these higher real rates.

AO: Speaking of that, do you think the investors who have jumped in and continue to jump in to the three major Wall Street industries. Do you think now should be the time that they should take some money off the table?

CM: Well, I think the industries have all got their own problems because, you know, the exposure to the big stocks, the big tech stocks is quite extraordinary.

You know, and back in the day, in 2007, Anjali, you'll remember that the big stocks were the oil stocks. Now they don't have much weight in the index, but actually that's probably the most attractive space to be because, you know, the oil situation is indeed very, very tight.

And the lack of investment going forward really does mean that any rise in demand is still quite heavily. There's a US strategic reserve to replace, and there's the natural trend of our growth over 1% a year. So I think that, you know, there are places to be, but you look at the big industries and things like the energy trade, just aren't very well represented.

So, yeah, I'm a big tech bear. I think it's overdone. It's not that I don't like what Silicon Valley is doing. I think it's amazing. I like the inventions and all that. I just think the pricing is horrendous.

AO: And last but not least, you've got a theory around the yen, don't you? And about how the money printing in Japan is largely imports sort of behind the asset flows into equities that we've seen recently. Talk to us a bit more about this theory.

CM: Well, a theory is a bit of an overstatement. It's more of a comment. But I think that what you've got is, to keep the world afloat, you've got to have sort of someone's got to be printing money. And it generally has been, you know, Japanese have been pretty good at it over the last few years, as have the Europeans.

And when everyone was doing it together, like in 2020, with the Americans, you know, full steam ahead, there was far too much money out there. But every time, I think, the Bank of Japan, when they basically just talk their bond market, they're creating money.

And so I think that's one of the places where it's coming from. And you see this low currency, this weak currency in China. The renminbi is basically in a 15-year low. And I think that the Japanese kind of look at that, the makers in Japan, the manufacturing sector, see that as an important relationship: the yen versus renminbi.

Yen is the cheapest in history

And over here, we kind of see the yen from a different perspective. We kind of see it as monetary and that sort of thing, and sort of waiting for policy shifts. But I think what we can be sure is it's the cheapest yen in history, massively undervalued on a purchasing power basis.

And the history of great bear markets is the yen tends to be a safe haven. So I think it's one of those trades that's going to be pretty interesting at some point.

AO: And while we have you, Charlie, we've been asking all our clients and all our interviewees this. What do you think of the AI space? Are you buying into it? Are you waiting before jumping in?

CM: We've had developers saying that actually the risk of not being exposed and running with it is far greater than actually being in it. Are you, I know you say you're a tech bear, but are you an AI bear or bull? So we've actually owned AI all year until last week, so we're no longer owning AI. I think it's madness. It's pricing. It's not the idea. It's not the tech. It's just the pricing. It doesn't make sense to me. Right. Thank you very much. We have to leave it there. Charlie Morris there speaking with IG on AI, on the yen, and also on his thoughts on the tech rally that's still underway. For more analysis, do look us up on at IG.com or at Angeline Ong on Twitter.