“However, China’s allocation is always considered a higher risk alternative compared to its US counterparts, and that should be reflected in the allocation,” he suggests.
Edited excerpts from chat with fund manager:
Rather than the tariffs themselves, the pure unpredictability of Trump’s moves has led to investors volatility across asset classes and regions. How do you deal with it?
Volatility was always anticipated. You’re navigating through bottom-up inventory selection. This is locked into long-term secular megatrends that do not necessarily work in the most vulnerable or widely discussed segments of the market. Additionally, it maintains a strict assessment discipline focused on high-quality names. High-quality stocks tend to trade at a wider market premium, but we guarantee that the current valuation premium remains lower than historical norms. We believe that if we can avoid extreme valuation fluctuations while maintaining reasonable earnings certainty, we can expect solid and relatively resilient results.
With the 25% tariffs in Mexico and Canada coming into effect on April 2nd, do you think it’s possible to be clear about Trump’s tariffs in the next one or two months?
You need to see how it unfolds. Given the current political situation and the April 2nd deadline, there seems to be no complete clarity about Trump’s tariff policy for the next one or two months. However, due to the possibility of last-minute policy changes and announcements, we can expect intense negotiations between the US, Mexico and Canada until the deadline. Market volatility is likely to escalate as April 2 approaches, and it is important for investors to remain flexible and prepare for multiple scenarios.
The US is currently contributing to nearly 70% of the global stock market and the control of the MegaCups, which raises concerns about overabsorption on Wall Street. do you agree?
We share concerns about the ratings of certain indexes, particularly Nasdaq and the S&P 500. But as we pointed out earlier, beyond the few megacups that dominate these indexes, the broader US market tells a different story. For example, the S&P 400 (US Midcap Index) trades along the historical average or at a slightly lower rating. To discuss whether the US constitutes 75% or 65% of the upcoming global equity market, the more relevant questions are: More and more, it appears that there are strong cases of actively investing in the US, given the opportunity to invest in large caps across buckets of various themes and styles. This is a very unique flexibility for the US.
Regarding concerns about US market advantage, we would be much more concerned if outperformance in US stocks is driven solely by multiple expansions rather than revenue growth. Over the past 10-15 years, growth in US earnings per share (EPS) on US terms has outperformed other major geography growth. As can be seen in individual stocks, sustained revenue growth often leads to a revaluation of the market. This is exactly what happened in the US.
For the US to lose its relative advantage, other regions need to show excellent sustainable revenue growth. If that happens, these markets will naturally direct premiums. As always, the key question is how well the premium is justified. Until there is a structural change in revenue growth, many non-US markets are likely to rely on valuation-driven cycles rather than long-term wealth creation.
As seen in the past few weeks, there has been a strong revival of interest in Chinese stocks. Hang Seng has increased by 21% so far this calendar year. Given the growth in revenue, cheaper valuations, and the possibility of changes in government policies, do you think this momentum is strong enough this time?
From a revenue (P/E) perspective on headline prices, there is no denying that Hang Seng appears to be inexpensive and currently below 11x revenue. In hindsight, it was probably a very underrated entry point.
However, looking at the ratings purely without considering revenue growth can be misleading. Hang Seng’s EPS peaked in 2018-19, with revenue growing at a CAGR of just 3% from 2013-2019. Over the past decade (2013-2024), there has been virtually no growth in EPS. Dividends are the main source of revenue. In contrast, the US index is increasing revenue with single-digit high to low double-digit CAGRS (in USD terminology).
Looking ahead, it is difficult to predict Hangsen’s sustainable revenue growth. Certainly, there is optimism around cyclical rebounds from low bases, and the sentiment likely drives the current rally. But beyond this short-term circular upside, it remains difficult to take a long-term structural view of Chinese stocks. For now, it may be wise to view this as a trading opportunity. The price at the entrance is significantly important and the ride may remain unstable.
When it comes to global investments, Indians usually go through Wall Street or hang Sen through ETFs. The US market is definitely not a value play, and there is doubt about the Chinese story. What is your suggestion to retail investors from India regarding global investment at this stage?
In the US, active stock picking at this stage may be perhaps the best approach, focusing on assessment discipline.
In China, stock-specific risks remain high, particularly due to regulatory uncertainty. The basket case probably makes more sense. However, China’s allocation is always seen as a higher risk alternative compared to its US counterparts, and that should be reflected in the allocation.
In a recent newsletter, we talked about global diversification. Please tell us how a geographically diversified portfolio can help Indian investors achieve better returns.
One of the most surprising findings in our study is that Indian and US stock markets have one of the lowest correlations between major global markets. In fact, if we rule out global shocks such as the global financial crisis and Covid, the correlation is very low.
This is important because it means that the two world’s most performant stock markets are near perfect complements to each other. When combined with a portfolio, they not only strengthen the overall returns of both US and Indian investors, but also significantly reduce the risk of Indian investors.
Important benefits? A smoother and more consistent journey of wealth creation. Furthermore, if one market performs less than other markets, investors have the opportunity to strategically redistribut the capital. Essentially, this represents the form of “free lunch” through diversification. This is something that global investors should actively utilize.
