As with any self-respecting crash, when investors flee, someone is gaining. And even in the Chinese landslide there are those who have been able to deftly move their pawns. A hedge fund of the Carlyle group, for example, managed to earn one hundred million dollars by guessing the bet on China and the yuan (with a performance of +75%). With perfect timing, according to what the Wall Street Journal reported, the Nexus Fund of the Emerging Sovereign Nations Group anticipated the change in Beijing's currency policy by betting against the yuan: in other words, through put options it bet on a fall in the yuan . Nexus was able to rake in such low-priced options because the majority of investors believed Beijing would support the yuan, not let it slide.
Then, around June, the climate changed: uncertainties about Chinese growth increased, stock prices experienced sharp corrections and investors began to wonder about the ability of the Chinese authorities to support the economy and restore confidence on the markets. The massive measures put in place by the Chinese authorities at the beginning of July were of little use: the cut in interest rates to new historic lows, the cancellation of all the new IPOs, the ban on short selling and the authorization of two agencies governments to invest heavily in publicly traded companies. By the end of July, investors had pulled $10 billion out of Asian-focused hedge funds and stocks had lost 30%. Last week's devaluation of the yuan raised even more concerns about the economy and the manufacturing PMI reading which fell to 47,1 in July, its lowest level in 77 months, dealt another blow. The Shanghai Stock Exchange has lost another 11% this week alone. For Goldman Sachs, however, the authorities' devaluation of the yuan has more to do with the dollar and US monetary policy than with the country's domestic economic challenges. The upcoming rate hike could push the dollar 20% higher in the next three years, notes the American broker, these are levels to which China does not necessarily want to be tied in the face of an export that risks losing competitiveness . For this reason, it has decided to act now, to buy itself flexibility in advance.
BEWARE OF THE FERRAGOSTO EFFECT
The picture is certainly not clear. Given the small stock market volumes during the mid-August period, which make the markets more volatile, it is still early to understand whether we are facing an August crisis or if a real trend reversal has begun. A situation which, moreover, adds to the already hot front of an oil in free fall at around 40 dollars a barrel. There are two main fronts that arouse fears among investors: on the one hand, the devaluation of the yuan reduces the profits made by foreign companies in a country whose economy is in any case slowing down, a fact that has triggered sales on global companies that have focused on Asian markets; on the other, once the Fed starts raising rates, US debt will once again become more attractive. In the background there is the risk of a currency war in an area where the other countries largely depend on exports. Vietnam, for example, has already allowed a slight devaluation of the dong and over the last year two currencies such as the Indonesian rupiah and the Malaysian ringgit have lost more than 15% of their value, so new interventions do not appear improbable. Still, China remains attractive to some. Last week, billionaire hedge fund manager Julian H. Robertson announced that he had invested in Yulan Capital Management, a firm that focuses on Greater China companies. In any case, some operators point out, "playing" the Chinese game is much more difficult because, on the front of capital controls, we do not know the rules that change every time.
BIG CAP IN THE SIGHT, Yes TO CARS AND LUXURY
For Western companies, the Chinese crisis involves numerous elements of risk: on the one hand, companies are penalised, such as those in the luxury sector, which looked with ever greater interest in the local market. On the other hand, the Chinese crisis translates into lower demand for commodities whose prices are also continuously decreasing. And for Western companies active in the production and transformation of raw materials, but also for those that produce machinery, the long-term consequences could be very serious. Also because this situation adds to a period in which these sectors have lagged behind.
For the experts at JpMorgan Cazenove, as far as European shareholders are concerned, we need to stay away from raw materials and energy but it's time to get back to cars and luxury: the former has been too penalized by recent sales, while the latter maintains attractive multiples. On the other hand, JPMorgan does not believe that Beijing can proceed with further rapid significant devaluations of the yuan: partly because it would only delay the Fed's monetary tightening, partly because the signals do not seem to suggest such a drastic slowdown in the Chinese economy; finally, because the amount of debt denominated in dollars of large Chinese groups is such that an increase in it would have serious repercussions on the financial stability of these companies. For JPMorgan it is possible that the yuan will be devalued by another 6% by the end of 2016, an intervention that would still be "digestible" by the stock markets.
Among the most affected lists, moreover, was the Frankfurt market: on the Dax a good part of the shares belong to industrialists and cars that depend heavily on exports to countries such as China. For management company Baring Asset Management this was an overreaction and believes that these declines represent a buying opportunity.
