MAXIN GLOBAL FUND - USD is a Long / Short Directional hedge Fund incorporated in Luxembourg. It started trading on February,22 2022 and replaces MAXIN ADVISORS' MODEL PORTFOLIO which has been trading since January 1st 2014. At MAXIN ADVISORS, we manage FULLY TRANSPARENTLY and publish the transactions on a DAILY basis and the details of the portfolio on a WEEKLY basis.
Trading China has been complicated in 2022, to say the least…
The extreme global volatility induced by rising inflation, rising rates and the war in Ukraine made 2022 a complicated year for wealth managers and one of the worst years, to date, for traditional long only portfolios, but things were made even more complicated and difficult to assess when it came to the second largest economy of the world.
Stringent COVID -fighting policies slowed the pace of economic growth and the 20th Congress of the Chinese Communist Party caused extreme volatility as America and the Western press antagonised China, heightened tensions in the Taiwan Straits and led global investors to flee Chinese assets.
But this is what secular turning points are made of…
Extremes in fear, liquidations and volatility..
Unfortunately, the phenomenon was compounded by the distorted view of China projected by the Western press, fuelling irrational fears..
But these fears are mainly due to a lack of knowledge and understanding of China, its society, its political organisation and its economic challenges. 3 years during which the country has been almost shut to foreigners have made it even less palatable, understandable and, ultimately, “investable” for global money managers and investors whom, for most, have never set foot in China.
At MAXIN ADVISORS, we are VALUE investors, we are RESEARCH-BASED investors, but maybe even more importantly in this case, we have been travelling, investing, visiting companies and had offices and analysts in China for more than three decades.
Over the summer of 2022 and going into the CCP Congress, we have been accumulating cheap Chinese equities, particularly those listed in Hong-Kong, where undervaluation was extreme and the discount to their domestics counterparts at a record high.
The sharp downdraft of October took its toll on the volatility of our portfolio but we held our course, never took losses and actually increased our exposure gradually on the way down.
All along we detailed the rationales behind our investment case and our view that we were reaching a SECULAR turning point in Chinese assets and our conclusion that CHINA will be the ONLY market to experience a SECULAR BULL market in the coming years.
Those are the rationales we have developed all over the summer :
- China is the world’s second largest economy of the world, it has the largest consumer market of the world, its economy is a market-economy and its Government sees its role at regulating the economy, determining and implementing strategic industrial policies, maintaining social cohesion and containing excesses pro-actively, sometimes at the cost of individual failures – real east developers – or even macro economic hardship when it comes to COVID-induced lockdowns.
- China wants, aims at, and is experiencing economic dynamics that will make it the world dominant economy in this very decade. To achieve this goal, China needs a strong economy. For the past 50 years, it has achieved substantially stronger growth than any other major economy of the world, a feature which, considering its size and the size of its population, was not an easy task.
Its successes of the past decades can be measured by the sixfold increase of its GDP in the past 20 years, hundreds of millions of Chinese joining an affluent middle class, massive increases in living standards, extraordinary investments in infrastructure and technology and the development of the second largest capital markets in the world.
At the same time, China reduced poverty to less than 1 % of its population, put in place the largest medical and Medicare system in the world covering in excess of 90 % of its population and developed a still nascent, but already sizeable, pension and retirement system.
Today, Its corporate giants are the world largest in their domains, from e-commerce to social media, banks, insurance, real estate, industrial, automobile, Electric vehicles, Solar energy, airlines, railways, steel, construction or heavy engineering. Chinese corporations dwarf in size any of their western competitors and are managed as private companies using the same operational financial, reporting and auditing standards of the West.
All these achievements were made possible by the combination of a free-market and entrepreneurship culture within the guidance and regulation of a Government that has a long-term vision rather than the populist short-term horizon imposed by Western democratic systems. Nations like corporations cannot be managed efficiently with 4 or 5 year time horizons.
To achieve its goals of economic dominance and social cohesion, China NEEDS a strong economy, it needs to make the Chinese more affluent and it needs entrepreneurship and technological innovation.
- To achieve economic growth, China, like all economies, needs corporations to invest…
For Chinese corporations to invest, China needs functional and efficient capital markets, bond markets for the debt part of balance sheets and equity markets for capital issuance and increases.
No economy of that size can rely on Government funding or funding by the banking sector alone. A functional economy needs to bring household savings to the capital needs of its corporate world and this is achieved by the capital markets. China’s bond market is already the second largest in the world and its equity markets would be the largest in the world if the US market were not so overvalued and the Chinese market so undervalued.
- The Chinese are amongst the world’s largest savers in proportion of their income. In the past decades, they have privileged real estate investments, as often happens in emerging economies. Bricks and mortar are palpable, they make the concept of property real, they are visible signs of wealth. The infatuation of the Chinese for real estate investments has been a headache for the Chinese Government for decades and we have ourselves witnessed at least three real estate crises in the past.
This time around, with the excessive leverage of some of the real estate developers, the Chinese Government itself engineered a tightening of liquidity conditions in the sector that led to the demise of some of the most leveraged players. We avoided that sector for years for those very reasons and then called the bottom of the real estate crisis in August 2022, starting to invest in China’s largest property developers at rock bottom valuations. We always made the case that the Government would provide the financial help to allow the sector to survive, and thrive again, now that the excesses have been wrung out.
Far more important is the fact that Chinese households have finally realised that putting all their savings in real estate was not the best asset allocation decision and we have, before most, predicted that the real estate crisis was a catalyst for a major shift of the Chinese savings out of real estate and into its financial markets. This potential shift has been estimated by CLSA at USD 18 Trillion over the next 8 years, or 100 % of China’s GDP.
- At the time of the CCP Congress, and when the world was scared by XI Jing Ping’s affirmation of his power on the Party apparatus and eliminated dissenting factions in the party, we made the case that the close allies of XI Jing Ping that were appointed to the standing Committee of the Politburo were 1) highly qualified technocrats with extensive experience at managing public affairs and 2) market and economy-friendly people with a great knowledge and experience of a private sector, the development of which they supervised themselves over the past decade.
Xi Jing Ping has a very strong team at the helm, and that team will take China to the next stage of its development keeping the same system, architecture, and philosophy that made the success of China in the past. With the Party being more cohesive than ever, the efficiency of the Nation’s management will be enhanced.
As a footnote on this topic, Western commentators have been highly critical of China’s “crackdown” on the technology sector and its billionaires, investors should realise that the wealth of the 1’000 Billionaires of China, like the 1000 Billionaire of the US , has all come from a entirely US-made bubble in US technology stocks listed in the US, with unorthodox monetary policies engineered by the Fed and the greed of US investors lifting tech valuations, Chinese like American, to un sustainable and artificial levels. We avoided the sector entirely and the collapse of Chinese tach stocks in February 2021 came form the US – ARCHEGOS and ARKK – not from China and it was swiftly followed by the collapse of the US technology segment in 2022. Chinese investors could not and did not participate in this binge and in the wealth creation of the Chinese billionaire and in China, the community prevails over the individuals. The Billionaire cult of the US leads to inequalities and social resentment and China privileges “Common Prosperity”, not individual riches.
But concluding that China’s tech giants will not thrive and prosper in the future is a short-cut that does not withstand objective analysis. Moreover, the role. of a state is to regulate and contrary too what happens in the US, China is not prepared to allow individuals and their private companies to collect and use big data without control and balances. We are far more worried about anti trust actions against Google, Amazon or META in the US than about the survival of Chin eye tech giants.
- Following the CCP Congress, we clearly predicted that the new administration would ease COVID restrictions, open its borders, enact wide-ranging measures to stimulate its economy by leveraging the Chinese consumer and boost its domestic financial markets without the need or help of foreign investors.
In the past three weeks since the end of the Congress, all these predicaments have been proved true and there is not one day that goes by without new measures being announced, be it on the real estate sector bail-out, monetary policy, fiscal policies or the implementation of less stringent COVID related restrictions.
- We have constantly made the case that because China did not indulge into any of the monetary and fiscal excesses of Western democracies over the past decade and during the COVID-era, China is actually the only economy of the world to have moderate inflation, stable interest rates, balanced public finances, a properly managed Central Bank and none of the excessive leverage of the Western corporate world and Governments. As such, its macro-economic and public finances environment is today the only one that allows stimulative policies, avoids a potentially devastating debt and asset deflation and provides the set up for moderate economic growth ahead.
As such, we see China and Chinese assets as the only economy in the world today to be “investable” from a long-only, systemic and macro-economic perspective, a call that many in the West may see as shocking, but we are about managing money based on objective research and not social media narratives.
- Contrary to what is sometimes unfortunately portrayed in the US and western press, since the election of Donald Trump in 2016, it is the US and not China that has confronted the other.
An exhaustive and objective analysis of facts and history shows that only the US has UNILATERALLY enacted sanctions, tariffs, legal actions and bans on China, Chinese corporations, trade and even non-US corporations doing business with China.
The short-sighted populist views propagated by the Trump administration led to the development of a worrying anti-Chinese sentiment in America and in the West based on fake or biased news, facts and interpretations.
It is America, and America alone that has painted China as the devil, as a threat to the world stability and as a threat to democracies.
The Taiwan issue has been here since 1948, but it is the US that has caused the Taiwanese issue to become a military concern, by flaming fears of Chinese military intervention. China has consistently re-affirmed its One-China policy and the desire to solve the problem peacefully through the One-Country-two systems formula.
It is only with the highly unorthodox intervention of American politicians in the Taiwanese issue and the highly unusual visit of Nancy Pelosi to Taiwan in the summer that China resorted to showing its military might, sending a message to the US that it had the military means to defend what it sees as an issue if national sovereignty.
Likewise, the issue of the Uygurs has been here for years and is a Chinese internal affair.
It is extraordinary, regardless of the judgement one can have on the reasons, the legitimacy or the implementation of the policies to see America interfering in an issue that is a Chinese internal issue through sanctions or condemnation. China never blasted or sanctioned America when it invaded Iraq on fake reasons or in Afghanistan.
We have advocated all along that Joe Biden would have NO CHOICE but to normalise its US-China policies, tone down its aggressiveness towards China and to establish a new framework of constructive cooperation between the world’s two economic giants.
Today’s historic 3-hours one-on-one meeting between Joe BIDEN and XI Jing Ping did exactly that !
A new era of more normal relationship has started, the planned visit of Anthony Blinken to China will iron the details, the two superpowers will agree on how to disagree on the issues where they do. to see eye to eye, bt in. the future they will try to compete while cooperating where they want and can.
We expect an easing of tensions, sanctions, tariffs, and rhetoric, the Taiwanese issue is no longer a military issue, and cooperation will resume on all the global subjects that require cooperation, such as Climate, the international world order, Asia, the Middle East and containing the fall out of the Russian war in Ukraine.
Investing monkey is about being rational, exhaustive, prudent and knowing what one does..
We were right on all the above calls and on our assessment of the situation in China.
When it comes to the Chinese financial markets, at a time where everybody was selling indiscriminately and bailing out, we were buying heavily. We predicted that the rebound would be extremely sharp and that the perception of foreign investors would change dramatically.
In the past two weeks, China’s HSECI index rose by +29 %, the Hang Sent tech index rose by 40 %, Chinese real estate stocks rose by 100 % and Chinese households are opening brokerage accounts at a pace not seen in a decade.
But this is only the beginning of a multi-year secular bull market that will see Chinese equity valuations expand considerably.
Valuations are still extremely attractive and we remain very long Chinese equities
MAXIN GLOBAL FUND – USD
Transaction Update 14 Nov 2022
With the significant rise in Chinese equities since the beginning of November our portfolio of Chinese equities has been doing extremely well and many of our positions are now turning into substantial profits.
During the October irrational downdraft, not only we have not sold anything but we actually added to positions taking our exposure to China to 120 % of our portfolio and averaging down in the most bombed out stocks and diversifying our portfolio in extremely cheap sectors.
Since then , some of our worst performing positions such as real estate developer Country Garden rose by 100 % and are now delivering a 35 % net return for our portfolio while many technology stocks have risen by 30 or 40 % in the past weeks, and it is not over…
Today, we kept on taking profits on COUNTRY GARDENS, HAITONG SECURITIES, SINOTRUK, and XINYI SOLAR or JD.COM. We also took some trading profits on our long FT50 China ETF with a view to re-instate them lower down.
Conversely, we added to our long positions in the KRANESHARE Golden Dragon Index ETF and into EV maker NIO.
Our exposure to China has now come down to 95 % of our assets.
But today, we were also extremely active Jin the other markets, taking profits on our long European equity positions such as ANTOFAGASTA, ZALANDO, and ADIDAS, all positions that have delivered between 15 and 30 % profits in a few weeks, and we started increasing our short positions in Europe by increasing our short positions in the EUROSTOXX 50 and the DAX while adding new short positions in Italy and Spain.
European equities are getting overbought after having outperformed the US considerably in November and we would not be chasing this rally form here.
We are now net short 10 % in Europe and intend to trade the short side through the indexes.
Likewise in the US, the indexes are losing momentum and tech stocks have been finding out difficult to make headways above the 4’000 level, our initial target for the bull market rally.
We took profits in AMD and increased our short position in the SP500 Future.
Maybe the most strategic move has been to take trading profits and exiting our Gold and Silver positions for now, having made 35 % profits in Silver and 12 % on Gold. Both metals are overextended and due for a breather. Our exposure to commodities is down to 1.6 %
In bonds, we added a new position in US High Yield corporate ETF HYG, further diversifying our exposure and taking it to 32 % of the portfolio
New Asset Allocation
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