A repeat of the GFC

Hue Frame

Frame Funds Management

Following on from our latest article ‘5 themes worth backing this year’, we identified a number of themes & opportunities we are monitoring for 2020 and beyond. The third theme & opportunity was a rebound in the Hong Kong equity market. Since publishing that article, we saw the novel coronavirus cause havoc to Asian equity markets, in particular, China & Hong Kong. For January 2020, the Chinese Shenzhen 300 and the Hang Seng were down -2.26% and -6.66% respectively.

With the novel coronavirus having caused mayhem across both these markets, does this change the theme & opportunity that we identified in Hong Kong? The simple answer is yes.

This article aims to assess the impact of the novel coronavirus on this them & opportunity.

Firstly, Chinese expectations for economic growth for 2020 is currently sitting at 6%. Recently, Chinese President Xi stated he still expects to achieve this rate of growth, even in light of the novel coronavirus which has caused a drop in output for Q1. The primary causes of this drop in output are due to the closure of retail outlets & manufacturing plants, transport restrictions being put in place, and most global airlines ceasing travel to China. If China has experienced a large drop in Q1 output, then it means that the next three quarters of output are required to run at a far faster rate to meet their annual target of 6%. With the trade war and generally soft global economic conditions, our view is that the likelihood of China meeting their current economic targets (with everything remaining equal) is improbable.

In our opinion, the Chinese government is required to launch an aggressive stimulus package, similar to the Global Financial Crisis, if they want to meet their targets.

A short look at history

In November 2008, as the United States experienced a financial melt-down, the Chinese government launched an aggressive stimulus package worth RMB4 trillion or US$586bn, which equated to 13.5% of their GDP at the time. This stimulus package was designed to support the Chinese economy by increasing the amount of government spending on infrastructure (38%), earthquake reconstruction (26%), rural infrastructure (10%), housing (10%) and innovation (9%). The stimulus plan helped fuel a strong recovery of the Chinese economy and helped overcome the large drag on growth from reduced exports, amidst the global recession.

Economic growth increased to 11.9% in the first quarter of 2010, compared to 6.8% in the final quarter of 2008, and 6.1% in the first quarter of 2009. As a result of this strong rebound, the Chinese Shenzhen 300 and Hong Kong, Hang Seng markets rallied 97.18% and 55.73% between 01.11.2008 & 31.10.2009 respectively.

More importantly, most industrial metals used as key materials of these projects, experienced a strong rebound. Copper and Crude rebounded 59.84% and 13.55% respectively, over the same period.

In conclusion

Our view is that the Chinese government may be somewhat optimistic believing they will be able to meet their current GDP forecasts considering the recent soft trading conditions. Taking all of the above into consideration, we believe that if the Chinese government does a stimulus programme similar in scale to what they did in 2008, the opportunity we identified in ‘2020 Investment Themes & Opportunities’ has become more compelling than ever. However, we also believe that there may be additional opportunities within the base materials space, copper, crude, aluminium, steel and iron ore, to name a few. 

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This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund (Fund). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Fund is not a reliable indicator of future performance. The value of an investment in the Fund may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Fund may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

Hue Frame
Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

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