Portfolio Update

Summary

• Closing long position on Chinese stocks (MCHI)
• Stop-Loss was triggered at a close below $44.50
• We’ll reconsider re-opening the trade if a more decisive policy response is brought forward

China’s Policy Response Proves Insufficient

We’re closing our long position on Chinese stocks (MCHI) as the price closed below our stop-loss level of $44.50 on Wednesday. It also broke through uptrend and horizontal support.

The stop-loss level was set slightly below that before the stimulus announcement of July 25th. Price falling below that level indicates loss of credibility in the policy response, negating the thesis.

The market has lost confidence on the authorities’ response on the back of continued weakening in the economy since the new measures were revealed around 3 weeks ago.

We opened the position on Chinese stocks (MCHI) in late-July based on a favorable risk-reward following the market’s positive response to the authorities’ policy announcement mentioned above.

We also mentioned that a more credible stimulus policy didn’t guarantee upside for Chinese equities.

In a note posted in June we detailed our investment thesis for Chinese equities. We believe the stocks offered significant upside if the authorities acted decisively on stimulating the economy.

The upside looked big to us because the economic uncertainty in China remains at historically-high levels, offering runway for a significant change in sentiment to take hold.

Since the policy announcement of July 25th, the worst returns within China were seen in Real Estate, pointing to continued worries around the housing market.

The Chinese yuan is now trading at historically-weak levels, pointing to the direness of the situation.

A more decisive policy response from the Chinese authorities to address the weakening macroeconomic backdrop would prompt us to reconsider re-opening this trade.

We’d be keen on a household-focused fiscal stimulus package that addresses the depressed state of consumer spending. That type of response could be what the market is waiting for.

We’re closing the MCHI position at Wednesday’s market-closing price and allocating the proceeds to cash (BIL). The loss on the position based on the initiation price is 7.8%.

The drag on the portfolio’s performance from the loss was small given the 5% size of the allocation.

Below is the updated Model Portfolio.