| On top of COVID, fires, and inflationary pressure, China’s stock market has taken a tumble in the last month. The drop is on the back of heightened policy uncertainty for the region. China has long repeatedly demonstrated its willingness and capacity to effect policy change very quickly. Targeted changes last year aimed at the tech industry stemming from security concerns and social inequality (trying to fight the 9-9-6 culture of IT business built on the backs of employees working from 9 am-9 pm, six days a week) were largely brushed off. Then a census report came out in April this year highlighting that China has not been making much progress on its demographic problems. Decades of the “one-child” policy have resulted in a declining population, and despite relaxing that rule years ago, Chinese birth rates remain well below the replacement rate. The report cited the high cost of raising a child as one of the reasons for the lack of progress. July 24th, China arbitrarily mandated that all after-school k-12 tutoring, a billion-dollar industry, is now not for profit. These actions triggered a sell-off as investors spooked on which industries future regulatory action could target next. A stark reminder that while it may ostensibly call itself a capitalist economy, China is a communist country at heart! Whether watching water bombers flying directly over your home or reading the daily headlines, harbingers of bad news instill in us the desire to react. When it comes to managing portfolios, it is tough to sort what is a threat to our financial prosperity from an opportunity from that which should be ignored. Short-term trading reacts on a day-by-day, hour-by-hour basis to what markets are doing. Most writing in financial media revolves around strategies that aim to take advantage of the headline of the day. Warren Buffet would counsel us to “buy when there is blood on the street.” Jack Bogle (founder of Vanguard and pioneer of the index fund) is famous for saying, “Don’t do something, just stand there” and “don’t allow changes in markets to change our mind.” With so many conflicting financial aphorisms floating around, it is no wonder investors get confused! I lean much more towards Buffet and Bogle when it comes to investment philosophy. A properly balanced portfolio where you partner with quality companies, rather than just buying stocks, should be the cornerstone of your portfolio. Worrying about short-term market fluctuations is a waste of time and energy. However, there must also be a process for when things need to be adjusted or changed. Adaptability is important. That’s why I read those financial headlines every day. I want to know if the maxims upon which I put together my portfolios are still valid. History has shown us that many of the beliefs and advice that we take as gospel now will not withstand the test of time. Future generations are sure to look at contemporary thinking as almost unintelligible when viewed through hindsight. Things change; portfolios should too. Critical thinking must be applied to our portfolios so that any changes are well thought through and not simply a reaction to a water bomber sighting! While the regulatory changes in China are disturbing, they are a normal part of the Chinese investment environment. They have changed the rules in the past; they will change them again in the future. It is still the second-biggest economy globally, and it is still projected to grow at 6% this year, and it is still only partway through the industrialization process. I am a fan of having some (small portion!) investment in emerging markets for those who can stomach a bit higher volatility, and recent regulatory changes don’t shake that belief. Delta variant and future iterations of COVID could disrupt economies if it forces a return of business closures. I am monitoring the latest scientific projections, but most of what I read still revolves around when we get a hold of COVID, not if. We may have to take a step back before going forward, but strong fiscal and monetary policy remains in place. There is a massive amount of pent-up consumer demand, and savings rates are at a decade-old high. At this point, I believe any dips in the market should represent a buying opportunity rather than a trigger point for exiting markets. A properly diversified portfolio that looks through short-term headlines is the foundation of my investment philosophy. Adaptability and willingness to take advantage of opportunities are the accoutrements that surround that cornerstone. A water bomber flying over your home doesn’t necessarily mean you need to panic. Still, it is undoubtedly a signal to self-evaluate, research and think critically to ensure you are on top of all relevant data before deciding on a course of action! For now, broad-based markets look good, but there are a few global hotspots we are closely monitoring to see if there is either an opportunity or need to act. I will be reviewing portfolios and touching base with most of you over the next quarter, but happy to discuss your investments or answer any financial questions you may have at any time! Stay safe, stay positive, stay disciplined and enjoy the rest of your summer! |
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