25 August 2019
Louis-Vincent Gave believes there are terrific investment opportunities in China's next phase of development. Photos: HKEJ, Bloomberg
Louis-Vincent Gave believes there are terrific investment opportunities in China's next phase of development. Photos: HKEJ, Bloomberg

Interview: GaveKal chief sees weak Europe and improving China

In the second episode, fund manager Louis-Vincent Gave gives the reasons why he is much more positive on China than Europe, and shares his best investment bets. Overall, he remains optimistic about the future, which he believes will be dominated by robots. No kidding. Gave boldly predicts he would be replaced by robots in future. His stock tips actually have something to do with them.

Question: How does Hong Kong’s youth compare with the ones you know in Europe?

Gave: Thanks to the euro, you have an entire generation that has been terrified. You have a 50 percent youth unemployment in Spain and Italy, and 35 percent in France. The problem is you graduate from the university, 23 years old, and you can’t find a job. No job for one year is OK, but then two years, three years, four years, you never manage to take the first step on the work ladder. You never manage to start your life. Terrible. The entire generation is terrified. In Spain, you have 50 percent unemployment rate. When you think of it, that’s a lot of lives being ruined. If I have capital, I’ll be looking to invest somewhere else.

Question: What is the main issue there?

Gave: It is obvious the euro doesn’t work. When you have 50 percent unemployment, you are obviously doing something wrong. The big issue is the elite are deeply committed to the euro.

In Spain, the noble are mostly nobles. Most of them have huge farms. They get so much money from the European Union because of the subsidy. They are deeply embedded they are not gonna leave.

In France, my little town, the elite are the civil servants. All went to the same school and have the same thoughts. They are building the system and they won’t go.

In Germany, the elite are the industrialists, those who own and run factories. These guys are committed to the euro because it has kept the Deutsche Mark much cheaper. There is no incentive for Germany to want to break up the union.

In Italy, big question. If anybody wants to leave, it is the Italians. Italian industralists are being killed. Usually at this point they would devalue their currency, but they can’t devalue. If anybody wants to leave, it will be Italy first.

Question: So are the Chinese handling monetary policy better than the Europeans?

Gave: China’s monetary policy, to me, does make sense. In China, it started off with the banks lending too much, banks that have too big balance sheets, and too big a role in the economy. Then you want to deregulate. At the same time, you don’t want the banks to go bust. So that means revitalizing the balance sheet, and that is what they do with preferred shares. But you do not want to provide free money, because the bank would take it and waste it. So you keep the cost of capital high. You can get some but at a price. That is different from Europe and the United States where they provided free money at no cost. The [Federal Reserve] is running monetary policy to please the stock market. We do whatever it takes. If the stock market is down 10 percent, come back for more money.

I think China’s monetary policy makes more sense. It is not a monetary policy that is favorable to asset prices. Obviously, real estate isn’t rising any more, and equity market has not been that great for the past few years. For investors [the situation] is not that great, but it is good for the Chinese economy. It makes sense. China’s stock market as a whole has been very disappointing for the past 10 years despite the strong growth. I don’t think there is strong correlation between growth and market.

One of the fallacies for foreign investors is that they look at China and they see good growth. So they buy, but the relationship is not a very good one.

Question: So it is not easy to make money in China when its growth turns slow?

Gave: Absolutely, you can still make money in China, just like you made money in Japan in the 1970s and 1980s when the economy was going down fast. But you made money from Japanese equity and property market. Why? The main reason is that when the economy went down, Japan stopped wasting capital.

Look at the past 10 years. China growth was so strong but it was not so good for the Chinese equities market. Because the growth is so capital-intensive, it is all about building roads and airports. That is hard for investors to make money on. So the next phase of development is for productivity and capital growth for equity. There will be terrific opportunities.

Question: What about the mainland property market, after a multiple-year downtrend?

Gave: We are in the phase of adjustment today following the overbuilding from 2006 to 2011. We have been in that phase for over 18 months. The reality is that the underlying demand is still very strong. You have more than 200 million urban people. As soon as they have saved enough money, they will want to upgrade their houses. I ask them, “What you are saving for?” And they always say they want to buy for a better home. Right now we are consolidating. Long term, very long term, China property is still a good buy.

Question: What are your best bets?

Gave: My best bet on risk-adjusted basis and high returns for one to three years will be dim sum bond because it is high yield with stable currency, and most of the issuers are very attractive. More risky bets are Taiwanese and Japanese companies who make new batteries, electric cars and self-driven cars. Over the next year, these will be hot items.

We have been consistent about one theme in the past decade: deflation is the reality of the world that we live in. I think the single most important factor behind deflation is technological progress, the fact that more and more low-end jobs are being replaced by robots. It is not just in industry but in everything.

So in your portfolio you need robot stocks. Machines with intelligence are starting to replace humans. Journalists are probably safer than money managers. Next time you see me, I would be a robot.

Johnson Sze contributed to this story

[Go to Part I of this story]

[Chinese version 中文版]

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