Mobius on US-China Trade War, AI Correction

Key Concepts

• US-China Trade Dynamics: Shifting power balance, trade deals, soybean exports, rare earths.
• Chinese Market Outlook: Increased attractiveness, technological advancements, self-sufficiency in chips, EV market growth, investor sentiment reversal, outperforming India and US markets.
• US Market Correction: Froth in AI space, potential for significant pullbacks (30-40%), buying the dip strategy.
• Emerging Markets (EMs): Benefits from US trade policies, Malaysia, Thailand, Taiwan, Korea, India as potential beneficiaries.
• US Dollar Strength: Positive for EMs due to export earnings, Fed policy impact, strengthening balance of payments.
• Diverging Rate Cycles: Fed's resistance to cuts vs. Asian central banks' willingness to lower rates.
• India's Market Challenges: Bureaucracy hindering foreign investment, need for hardware industry development, potential for Chinese investment.
• Korea's Market Attractiveness: Strong technology sector, growth in healthcare and cosmetics, current sell-off impact.
• Retail Investor Influence: Driving markets in Korea, India, and the US, potential risks during corrections.
• Global Economic Interdependence: US market reflecting global economy due to multinational corporations.

US-China Trade Relations and Market Winners

The discussion begins by analyzing the current trade landscape, particularly in Southeast Asia, and identifying potential winners and losers. The speaker posits that the United States has been a significant winner to date. This is evidenced by the meeting between Xi Jinping and Donald Trump, where Trump reportedly "walked away with what he wanted," specifically securing soybean exports to China. This was crucial for American farmers and, by extension, for electoral considerations. Additionally, China's control over rare earths was also a point of discussion. Trump's subsequent visit to Southeast Asia and his trip to Japan are also seen as having put China in a "pretty bad position."

Shifting Dynamics within China and Investor Sentiment

A major shift is observed within the Communist Party of China (CCP), leading to a potential "much friendlier orientation" and increased openness. This internal change is making the speaker more bullish on the Chinese market. While the US may have gained an advantage in trade, China is not expected to weaken. Instead, China is becoming more attractive.

Investment Opportunities in China: Technology and EVs

The primary attraction in China for investors is its technology sector, which is continuously improving. China's commitment to self-sufficiency in chips and other technological areas is highlighted as a critical factor for investors. The speaker is particularly interested in companies that have a technological edge over their US and European counterparts. The Electric Vehicle (EV) market in China is described as "incredible," with Chinese vehicles surpassing luxury brands like Rolls Royce in terms of ride quality, as experienced by the speaker. This indicates China's rapid advancement in technology.

Reversal in Investor Sentiment Towards China

There is a perceived convincing reversal in investor sentiment regarding China. Previously considered "uninvestible," the Chinese market is now outperforming other markets, including India and, surprisingly, even the US market in recent times. This marks a "different era," though it will take time for investors to adjust. The speaker anticipates a "longer time rerating of China" if current trends continue.

Assumptions and Risks for China's Market Rerating

This positive outlook for China is contingent on the continuation of current political trends, specifically the departure from a "hardline wolf warrior" approach. The expectation is that the CCP will adopt a more friendly stance towards the US, which would significantly alter many dynamics.

The biggest risk for China is the potential return of the "Wolf warrior stance" promoted by Xi Jinping. If this occurs, the market sentiment could quickly reverse. However, the speaker believes that the CCP, in its latest plenum, recognized the need to mend relations with the US. The fact that Taiwan was not mentioned during the Xi-Trump meetings is considered a critical indicator of this evolving relationship.

US Market Sell-off and AI Correction

Despite the speaker's assertion that the US is a winner, the recent market sell-off is addressed. This is attributed, in part, to the "froth" in the AI space. A significant correction is expected in companies heavily focused on AI and investing heavily in its infrastructure, as some valuations are deemed "out of sight." While AI itself is critical, the speaker anticipates a pullback in related infrastructure and other spending.

The speaker defines a "big correction" as a 30-40% decline, which is expected to be short-lived, characteristic of bear markets being shorter than bull markets. Long-term investors are advised to "hang in there." The current market sentiment is described as "euphoric," but investors are urged to be prepared for a pullback and to "buy the dip" if they believe in the long-term upward trend. The speaker expresses a desire for a 30-40% pullback to "buy a lot."

Emerging Markets (EMs) and Trade Policy Benefits

The US trade policies are seen as benefiting Emerging Markets (EMs) by encouraging them to produce and export goods that China previously dominated. Southeast Asia, including Malaysia and Thailand, is expected to benefit, as are Taiwan and Korea. India is also developing its hardware industry for electronics. While China is moving up the technology ladder and shedding low-tech industries, it will also benefit from this transition.

Capital Flows and EM Performance

Despite discussions about a rotation back to EMs, a significant rotation hasn't fully materialized. However, the speaker notes that EMs are performing well, outperforming the US market in the short term, largely due to China's substantial weight in EM indices. India is expected to rebound, and together, China and India will significantly boost the overall EM performance, potentially leading to a spillover effect into other emerging markets.

Malaysia is highlighted as looking good, with its currency, the Malaysian Ringgit, strengthening against the US dollar. The Thai Baht also appears strong. While other currencies are weakening against the dollar, the trend is one of dollar resilience.

US Dollar Strength and its Impact on EMs

The Federal Reserve's (Fed) policy of not cutting rates as much as anticipated is contributing to a stronger US dollar. A stronger US dollar is considered beneficial for EMs as it allows them to export and earn more dollars. The US dollar index, after a substantial decline, is now showing signs of moving upwards and is expected to strengthen further. This is linked to the Fed's policy of strengthening the US balance of payments and the US economy's general confidence. This trend is believed to have just begun and could continue.

Diverging Rate Cycles and EM Economies

The divergence between the Fed's resistance to rate cuts and Asian central banks' willingness to cut rates is seen as positive. As the Fed eventually lowers interest rates, other countries will follow suit, which will be beneficial for their economies. This creates a "very nice period." However, the high valuation of the US market is described as causing "nosebleed," but emerging markets are expected to follow.

India's Market: Fundamentals vs. Bureaucracy

Despite India's strong GDP growth (in excess of 6.5%) and its large domestic market, its currency is among the weakest in the Asia region. The speaker attributes this to bureaucracy, which makes the process of investing in India "terrible." It takes months to get money into India, and approvals can take a long time, hindering the absorption of foreign investment. This bureaucratic hurdle is seen as a significant challenge that needs to be addressed for India's market to reach its full potential.

India's Investment Needs and Potential Chinese Involvement

Beyond just dollar inflows, India needs investments in technology and other areas. The speaker suggests that India should invite and welcome Chinese investment, despite their fraught political relationship. China can contribute valuable technology and manufacturing expertise that India can leverage for exports. Conversely, China might establish factories in India to export to the US if direct exports become difficult.

Playing the Indian Market: Hardware Technology

While India has been a strong software exporter, the way to play the Indian market is by focusing on hardware technology. Companies like Tata are doing well globally in software, but the focus needs to shift to exporting computer hardware. This requires a business culture that facilitates foreign investment and makes it easier to invest. Exporting hardware, unlike software, requires export permits, making the business environment crucial.

Korea's Market Attractiveness and Current Sell-off

Korea is considered one of the most interesting markets, ranking high alongside Taiwan. Korean technology has advanced significantly, particularly in sectors like healthcare and cosmetics. However, Korea is currently experiencing a severe sell-off, which is impacting many markets. Despite this, the speaker believes that development will continue.

Retail Investor Influence and Market Health

The current trend of retail investors driving markets in Korea, India, and the US is noted. The speaker questions the health of this trend, especially in light of anticipated corrections of 30% or more, which could be damaging for these investors.

The US Market as a Global Indicator

The US market, representing about 70% of global equity investing, is crucial to watch. It is argued that the US market often reflects the global economy rather than just the US economy, due to the multinational nature of companies like Apple and Amazon, which have significant sales and supply chain operations in emerging markets. Therefore, a downturn in the US market would likely impact global markets.