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The FSA Spy market buzz – 27 January 2023

Change at AllianceBernstein, Schroders on China, delisting in Shanghai, mean reversion, HSBC’s ESG conumdrum, Vanguard’s flows, ARK vs Energy, Charles Dickens and much more.

Perhaps the excitement of a return to normal Lunar New Year celebrations has flowed through to markets, too. January has been an absolute cracker so far, notes Spy. The Nasdaq is up about 12% already this year and emerging markets are seeing powerful rallies. Will the exuberance last? Spy certainly hopes so. After 2022’s dreadful performance, the horrific war in Ukraine and geopolitical squabbles aplenty, a year of market enthusiasm would be a soothing balm for shattered nerves.

News reaches Spy that Derek Tay has stepped down from AllianceBernstein this week after 16 years. Derek, based in Singapore, was until recently managing director of the southeast Asia client group for the American firm. Derek has publicly stated that he is taking a career break and is not moving to another firm anytime soon. Derek joined AB in 2007 in the mutual fund distribution team and ascended to MD as his career progressed. Spy has no news on who his successor is. AllianceBernstein has had success in the last three years with its AB – Concentrated US Equity Portfolio, which has returned nearly 22% a year.

While not exactly screaming ‘buy, buy, buy’, Schroders reckons the tide is turning in China and not just because of the ending of the zero-Covid policy. In a thought leadership piece out this week, Tom Wilson, Schroders’ head of emerging market equities, writes, “Given these developments we have become neutral in our outlook. Encouraging signs in the diplomatic arena are also positive for near-term sentiment, but geopolitical tensions remain a risk to monitor closely.” Neutral is downright better than where we were and gives some welcome, balanced, optimism. The piece is worth reading in full.

And talking of China, Caixin is reporting something interesting. Apparently, the regulator forced more companies off local stock exchanges last year than ever before. 42 companies with financial irregularities or those that failed to meet the exchange rules were unceremoniously kicked out and delisted. Spy is deeply encouraged by this. The maturing of China’s stock markets into more reliable venues for market participation is most favourable. China has been rapidly opening its financial markets to foreign participation, too. If China is ever to rival the US capital markets, this is a necessary step to ending the perception of a wild west with much stricter rules and greater transparency.

Daniel Kahneman, a Nobel Prize winner for economics, wrote a book titled, Thinking, Fast and Slow. In that, he points to one of the most powerful of all economic and social laws: reversion to the mean. Things that go up, come down; things that outperform, underperform and vice versa. Spy had a look at the three best performing funds in the last 12 months and the worst, according to data from Morningstar in Hong Kong. If Kahneman is right, selling the top three and buying the bottom three may just reward the investor. Spy was intrigued to see AB feature in both lists.

Funds% Return
JPMorgan Multi Income97.91
AB (HK) Low Volatility Equity Portfolio64.41
ChinaAMC New Horizon China A share48.39
AB Emerging Markets Debt Portfolio−90.77
Templeton Eastern Europe Fund−64.29
Schroder International Selection Fund Emerging Europe A1 Accumulation−62.76

Is HSBC still grappling with what to do about ESG after the very public debacle with Stuart Kirk? Spy thinks so. HSBC Asset Management’s UK CEO, Stuart White, was reported this week as saying prohibiting greenhouse gas emitters from investment funds will not solve the climate crisis. “I am a very strong believer in engagement rather than exclusion in terms of the transition to net zero.” While engagement is not necessarily a bad thing, it does have a whiff of ‘have your cake and eat it’. Spy can’t be certain but would not be surprised if actions in Texas and Florida are forcing asset managers to think long and hard about having rigid investment limits.

When is $151bn in net flows not a great number? Well, when the previous year you had $300bn. Spy can only pity Vanguard who reported this week that its annual flows had halved from the year before. The fact that its flows were higher than the entire assets of the vast majority of managers might be lost on some catty commentators.

Fun fact for Friday. In 2022 the Ark Innovation Fund, managed by Cathie Wood, fell a rather whopping 67% but managed, nonetheless, to grab inflows of almost $1.3bn. Meanwhile, the S&P 500 Energy ETF produced a total return of 65%, yet had outflows of $27m. Is this a case of selling the winner to buy the loser or a marketing triumph from Ark?

Some lessons are timeless. Charles Dickens, in his Victorian novel David Copperfield, wrote what has become known as the Micawber Principle. “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” It is a lesson America has clearly forgotten, if it ever learnt it in the first place. From 1972 to 2021, the government, on average, spent about 20.8 percent of gross domestic product while collecting about 17.3 percent of GDP in revenue. It covered the gap with $31.4trn in debt. With the debt ceiling now causing political havoc, Dickens might have said, “I told you so.” The US is not the only one: France, Italy, Japan and the UK are all addicted to spending more than they earn. This won’t end well for any of them.

Until next week…

Part of the Mark Allen Group.