China GDP scepticism upends trading strategies
Distrust in official data coincides with hedge-fund closures, including Nevsky Capital.
China’s 6.9% official growth rate released on Tuesday – the lowest rate of annual expansion since 1990 – was, among other things, once again met with scepticism. Market participants claim Beijing routinely fudges the numbers to fulfil political objectives.
Perhaps it wouldn’t matter so much if distrust equated only to a minor and predictable inflation of numbers, but in January Fathom Consulting estimated China’s GDP growth at 2.4%.
This divergence between official and private-sector estimates has market consequences.
Nevsky Capital’s decision to stop managing its $1.5 billion hedge fund in December was notable, but not entirely out of the blue: in the past six months alone, the hedge fund industry has also lost Liongate Capital and a key Fortress Investment Group fund, with BlueCrest Capital saying it will return outside investors’ money.
Almost 700 hedge funds worldwide were liquidated in the first nine months of 2015 alone, according to Hedge Fund Research.
However, Nevsky might be the first to say out loud that China, in large part, has made the whole business model unmanageable.
Nevsky wrote a letter to clients explaining itself, beginning with a recap of the investment process it has used throughout the fund’s 15-year life: top-down forecasting of macroeconomic variables combined with bottom-up forecasts of company earnings.
It is a process that has required, among other things, transparent “and truthfully compiled” data at a macro and company level, and logical decision-making by policymakers.
The problem is, Nevsky no longer thinks it can count on that, and China, it says, is the biggest culprit.
Nevsky says data releases have become less transparent and truthful, and that as China and India have grown in importance, the problem has been exacerbated. Nevsky doesn’t believe either country’s stated real GDP growth.
“This obfuscation and distortion of data … makes it increasingly difficult to forecast macro and hence micro as well,” it states.
Companies are disclosing less than ever, and the transparency of decision-making has declined, Nevsky says, again naming China as a key culprit, with a twist of Yeltsin-era Kremlinology.
“It is now the norm, not the exception, for most countries in the emerging world,” it states. “We are not convinced that knowingly continuing to bang our heads against these newly erected brick walls would be a sensible decision.”
Does all of this stand up? One school of thought has it that Nevsky is simply picking a good time to throw in the towel and blaming a changing world for doing so; certainly, when the letter goes on to moan about Asian time zones, there’s a sense of it looking for reasons to get out.
At the same time that Nevsky is making its excuses, others are finding opportunity in more focused ways: Stockholm-based East Capital last month announced a China fund with a thematic environmental strategy, requiring a Swedish CIO to spot clean-tech opportunities in one of the world’s biggest polluters.
So not everyone thinks China’s a problem rather than a prospect.
Nevertheless, there is an important point in Nevsky’s complaint. In an era when falls in China’s domestic – and largely restricted – A-share market can prompt falls of several percentage points in stock markets worldwide, the country is increasingly relevant to fund managers everywhere, even if they don’t invest in China themselves.
And, following on from that, if nobody trusts the data coming out of this vastly influential market, what does that mean for people whose investment decisions are anchored on reliable data?
Attempting to predict market movements in speculator-driven Shanghai or Shenzhen is a fool’s game at the best of times and has historically been shrugged off by the rest of the world.
However, if it’s going to translate so readily into global shocks, as the start of the year suggests, then an awful lot of fund strategies are, like Nevsky’s, going to become steadily harder to implement with confidence.