Platinum: The big US short and a buy on China

This stance shouldn’t come as a surprise to long-term investors in Platinum Asset Management’s Platinum International Fund. After all, the fund typically performs best when the US is performing worse. In a sign of the times to come, Henry Polkinghorne, Investment Specialist at Platinum, says that their net market exposure is at 55%, the lowest it has ever been, while net exposure to the US is at 6%.

On the flip side, and upping the stakes further, Platinum have declared the biggest opportunities are currently to be found in China. It’s a big call, particularly given it comes at a time when Chinese banks have tapped bond markets for around 30% more funds than last year, and China’s property market continues to suffer.

In this wire, I explore the insights from Platinum’s recent webinar with investment specialists Henry Polkinghorne and Julian McCormack to find out why the US is on the nose and the more optimistic stance for China.

Bleak house – is the US really at risk of a Dickensian future?

“You are in the deflation of one of the greatest equity market bubbles of all time.” Julian McCormack

McCormack notes that US company valuations are extraordinarily large compared to history and reflect bubbles of the past.

To add to the story of a bubble, equities are at some of the highest levels as a proportion of total household wealth that they’ve ever been, backed by significant gearing. Consumers added $500bn at the end of the last cycle to the end of November 21, and this is just falling off now.

1. High corporate profitability – in fact, there was 50% growth in corporate earnings in the space of the two years to April 2022. Apple (NASDAQ: AAPL) and Microsoft (NYSE: MSFT) are shown as an example. There were also 2 million new business applications over this period.
2. US retail sales explosion – supporting profitability. This was a result of increased money supply. Retail sales jumped $200bn in two years compared to previously where an increase of $100bn took several years.
3. Dramatic increase in money supply to manage the COVID-19 pandemic: it was a fiscal surge of approximately 20% of the GDP that went into consumer bank accounts. Bank accounts effectively jumped from $13tr to $18tr.

How hard the US will land as the bubble bursts is up for debate but, either way, the Platinum team view the US market as highly concerning and have underweighted investments there. Their net exposure to the US is 6% (as of 31 August 2022). They have the bulk of their long investments in Asia instead.

Can the dragon fly again?

Arguably, sentiment towards Chinese investment is the lowest it could be. Elements of its response to the COVID-19 pandemic could be described at best as a PR disaster. Continued efforts to maintain a covid-zero policy have not helped. But ignoring this, China was already heading into a challenging period.

Chinese property catapulted into public awareness last year when Evergrande defaulted on payments and all its construction halted. The Chinese government has supported Evergrande and the property market since then, with Evergrande tipped to recommence all its incomplete construction work later this month.

Another concern has been the uneasy relationship with China and the rest of the world in recent years. Even looking at recent headlines, there are some fears of an invasion of Taiwan.

“China has been the biggest beneficiary of globalisation. Sanctions [over Taiwan] would hurt China, even if it would also hit global markets. The Chinese government would be very conscious of this.”

Chinese markets haven’t moved much in the past decade. This may sound like a negative but Polkinghorne suggests this is an opportunity. It also suggests somewhat more stability in the coming markets. Platinum have weighted long to China with a 19.1% exposure (as at 31 August 2022).

There are some other glimmers of hope for China too.

Inflation is one. China is in a recession and its inflation is 2.5%. Policies have been relatively restrained too. While other major economies relied on large stimulus payments during the COVID-19 pandemic, China avoided this. It was already managing other financial risks and feared creating bigger problems. This has meant it isn’t experiencing some of the same challenges of countries like the US or UK at the moment.

“While critics may be concerned about the accuracy of these inflation numbers, we’ve believed the numbers when inflation was above 8% [in 2008] so it’s fair to accept these numbers now.” Henry Polkinghorne

China has already gone through a lot of the pain that other economies are entering now. There’s also been substantial work to restructure a range of sectors and industries to be more globally competitive and sustainable in recent years.

China’s financial sector is a prime example of these efforts.

What’s also interesting is earnings projections across the country in the coming years.

China’s PE ratio is at 8.9x, compared to the US at 16.3x. This alone is a warning trigger for US equities, while China sounds more reasonable.

EPS growth projections for China also stand out at 21.7% compared to 7.4% for the US.

Where next in an uncertain world?

Platinum’s net exposures favour China but at the end of the day, they are focused on value stock selection using long/short approaches rather than a pure macro style. This means that they still hold US companies though their exposure is far less than China.

The stocks they are focused on in the coming market typically meet one of the following criteria:

• Businesses that were hurt in the pandemic (but may benefit now).
• Businesses that access structurally attractive thematics.
• Businesses that weren’t part of the bull market but stand to benefit in these markets instead.

So for example, the travel industry was hit hard during the COVID-19 pandemic and is now benefiting from a resurgence in interest. Along with others, Platinum holds Chinese company Trip.com Group, one of the largest travel planner companies in the world.

Another example is the semiconductor market. It was hit by supply-chain shortages during the COVID-19 pandemic but is also an essential component of a number of structural thematics, such as the shift to electric cars. Platinum holds US company Microchip Technology (NASDAQ: MCHP), one of the leaders in this space.

Will Platinum win the bet on China? Time will tell.

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