Can the China Rally Continue?

China Trade War & Policy Outlook

• Stratford Dennis's base case is an agreement or deadline extension between the US and China before the current expiration.
• Despite a "policy put" from Chinese authorities, Dennis notes that market volatility creates a risk profile skewed to the downside.
• Policymakers maintain confidence in achieving approximately 5% GDP growth for the year despite external trade pressures.
• Upcoming catalysts include the release of China's five-year plan within the coming weeks.
• Dennis is implementing hedging strategies to protect against a scenario where no trade agreement is reached.

Chinese Equity Strategy & Valuations

• Goldman Sachs' "house view" anticipates a 30% upside in Chinese equities over the next two years.
• Valuation differentials favor China, with large-cap tech stocks comprising ~35% of US market cap versus ~12% in Chinese indices.
• Low institutional ownership in China is identified as a primary driver for potential price appreciation.
• The firm perceives current US tech valuations as less attractive compared to the relative value in the Chinese AI sector.

Emerging Markets ex-China (EMX) Focus

• The strategy for EMX is largely driven by expectations of a weaker US dollar and lower interest rates over the next year.
• Brazil is highlighted as a core overweight position due to an anticipated interest rate cutting cycle starting next year.
• Brazil currently offers high nominal yields at 15%, despite local investors shifting capital to fixed income due to rate levels.
• Global positioning in Brazilian equities remains light, creating a supply-demand imbalance favorable for price growth.

Risk Assets & Specific Trades

• Argentina is classified as a high-risk, non-core position that is monitored but not actively held due to limited equity access.
• The primary specific trade recommended is buying upside calls on Brazilian equities.
• This trade is based on the observation that implied volatility in Brazilian equities remains low and is uncorrelated with broader global sell-offs.

Data Gaps & Forward-Looking Risks

• The ongoing US government shutdown has created a "data vacuum," limiting traditional economic indicators for the immediate term.
• While markets are currently comfortable with the lack of US data, Dennis warns that uncertainty regarding future economic outcomes will widen over time.
• The firm anticipates the absence of data will eventually become a material concern for market pricing and strategy.

External Observations

• The host and guest noted a temporary comfort in markets despite the lack of official US data, contrasting this with historical patterns where "walls of worry" precede corrections.
• Dennis expressed a positive outlook regarding the New York Knicks' ability to win the championship, noting his 21-year tenure in New York.