Just in time for the Chinese 50 bps RRR cut, we get a note from Albert Edwards reminding us just why this desperate and sudden move from China comes: "We have identified a China hard landing as one of the biggest investment shocks next year." Not only that, but the SocGen strategist takes a long overdue swipe at the world's most ridiculous concept, Jim O'Neill's BRIC debacle: "Despite recent poor performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym - Bloody Ridiculous Investment Concept." It appears that the PBOC was well aware of this re-definition when it decided to announce to the world that it has started easning once again last night.
Why the feud with the BRICS?
Eurozone equity markets have suffered badly this year amid the crisis that has engulfed the region. Speaking to clients, they still retain a preference for the rapidly growing emerging markets (EM) against the highly indebted and struggling developed economies. Yet, much to many investors' surprise, EM, and especially the so-called BRIC equity markets (Brazil, Russia, India and China), have performed even more poorly (see chart below).
Despite recent poor performance investors still seem to favour EM and the BRICs. My good friend and former colleague Peter Tasker came up with an alternative for the widely (over) used BRIC acronym - Bloody Ridiculous Investment Concept.
As my former colleague James Montier always used to point out, investors are suckers for a good story. When you look at the evidence, there is absolutely no correlation between investment returns and economic growth because investors overpay for growth stories and there is no margin for error (see Dimson, Marsh and Staunton at the London Business School 2005 - link). In addition, The Economist magazine reports that Paul Marson of Lombard Odier has extended this research to emerging markets. He found no correlation between GDP growth and stock market returns in developing countries over the period 1976-2005. A classic example is China; average nominal GDP growth since 1993 has been 15.6%, the compound stock market return over the same period has been minus 3.3%. (link)
Yet investors persist in the BRIC superior growth fantasy. But it is no different from many of the other investment fantasies I have witnessed over the last 25 years - only to see them end in severe disappointment. If growth does matter to investors, they should be worried that things seem to be slowing sharply in the BRIC universe, most especially in Brazil and India (see chart below).
As for China...
We have identified a China hard landing as one of the biggest investment shocks next year. The crucial driver investors are missing is the change in global liquidity as measured by growth in EM foreign exchange reserves (see charts below). Confidence often ebbs as growth slows and EM economies are seeing a sharp drop in reserves and liquidity tightening. In this context did anyone spot the Chief Economist of the China State Information Centre calling for a yuan devaluation now that reserves are falling (link). Shall we call this Investment Shock II?
How conveneint of the PBOC to confirm Edwards' thesis literally minutes after this note's publication.