To clarify this aspect right from the beginning, a contrarian investor is someone who doesn’t mind trading against the proverbial crowd and, on the contrary (pun intended), builds his entire investment model around identifying instances in which the market is so wrong that asymmetrical opportunities pertaining to “betting” against it present themselves.
In an ideal scenario, a contrarian is someone who, as the saying goes, buys when there is blood on the streets and sells when everyone and his dog is bullish.
What would a contrarian say about China at this point?
First and foremost, a contrarian needs to be good at spotting instances in which one of the two prevailing emotional mindsets takes over: fear or greed.
Can those who invest in Chinese assets be considered “greedy” at this point?
In fact, all we have to do is look toward other markets to spot textbook examples of exuberance or even, as Alan Greenspan would put it, irrational exuberance. From US stocks which were flirting with all-time highs to ridiculously overpriced sovereign bonds (nations that can barely be considered solvent based on realistic models, yet are able to borrow money as if they are top economies), let’s just say there are more tempting options for contrarians when it comes to betting against something.
As far as China is concerned… not so much. On the one hand, Chinese stocks for example have under-performed and the same way, China itself is definitely no longer “hot” enough for greedy investors to flock toward it and buy without even thinking twice. On the contrary, market observers are frequently doing the exact opposite: pointing out that opportunities are a thing of the past in light of the fact that the pre-2010 “glory days” of double-digit yearly GDP growth are gone. From bearish macro outlooks to even the (in)famous coronavirus situation, let’s just say that it is hard to put forth a compelling case which involves China being in the proverbial spotlight in a positive manner. In fact, doing the opposite tends to be quite a bit easier.
At the same time, however, many of China’s fundamentals haven’t changed. We are still looking at a population which exceeds 1.4 billion, people with an economic potential which has just started being unleashed, as made clear by the fact that the GDP per capital in China is still light years away from those its Western counterparts can brag about.
Therefore, a valid case could be made that a wise contrarian would be looking for an exit from Western markets and for a good entry point when it comes to Chinese assets.
Does this mean he would sell all of his let’s say US stocks?
Does it mean he would buy everything he could with respect to Chinese assets right away?
Once again, no.
The name of the game is identifying opportunities in a broad sense as a contrarian, in our case the underlying idea that Western assets are (still) on the overvalued side and Chinese assets are undervalued if anything. As such, the contrarian in question would simply keep his eyes open and when the right set of circumstances presents itself, take action on the buy as well as sell side.
If he suspects an even severe correction than the one experienced in 2020 thus far is around the corner, he would sell his Western assets and wait for the correction in question. As history has proven thus far, should he be right and the crisis actually gets worse, then yes: Western asset prices would plummet further but Chinese assets even more so, even if the crisis in question has clear Western origins (as made clear by the Great Recession, which had its origins in the Mortgage-Backed Security debacle of the United States but affected poorer nations more so than the US).
Simply because the market perceives China as a riskier jurisdiction.
As such, our contrarian would most likely sit on the capital he has accumulated by selling Western assets and wait for despair to kick in when it comes to their Chinese counterparts.
Does this sound a bit cynical?
That’s because… well, it is.
What is equally true, however, is that being a contrarian can work remarkably well, leaving the fact that it does not represent let’s say the most politically correct approach in the world aside.
Of course, the scenario we have put forth through this article is merely an example which had one purpose and one purpose only: making it clear how a contrarian investor could perceive the current situation when it comes to Chinese as well as Western assets.
Do we consider ourselves contrarians here at ChinaFund.com?
To try to be as precise as possible, we will state that no, we do not consider ourselves strictly contrarians because we do not believe in being a proverbial one-trick pony as investors. However, when asymmetrical contrarian opportunities present themselves, we do our best to be on top of them in a manner which would make any contrarian proud.
This is why, unlike many other players who are bullish on China long-term (and yes, we are as well!), we choose not to be blind perma-bulls who only see bright days ahead. Instead, rather than hide from emotion-driven ups and down that are inherent, we actually embrace them, trying to ride waves of excessive optimism to the top and sell before everyone else, with the clear intention of buying back lower when everyone thinks Chinese assets have no future.
Once again: politically correct?
We like to think so.
If you would be interested in letting us put our expertise (contrarian or otherwise) to good use when it comes to helping you and/or your organization reach Chinese asset exposure-related goals, simply get in touch by leaving us a message through our website’s Contact section and we will get back to you as soon as possible.