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YOU WANT TO KNOW THE MANY WAYS IN
hich China and the U.S. are actually quite
milar, and why the years 2020 and 2021 are
portant, you can ask Sean Darby, the Hong
ong–based chief global equity strategist for
fferies. For decades, the 55-year-old Darby
s been a reliable source of insight for global
vestors, having worked previously as a strat-
ist at Nomura and Dresdner Kleinwort Ben-
n, and before that as an investment manager
mself. We checked in with Darby about what
e might look like after the European Central
ank’s launch of a major stimulus package and
e political protests in Hong Kong. To learn
e answers to these questions and why China
d the U.S. are more alike than you think,
ad the following edited excerpts.
arron’s: What do you think of the ECB’s latest
ckage to boost growth?
rby:It didn’t disappoint investors. It duly
livered a deposit rate cut of 0.1% and re-
arted its bond purchase program at 20 bil-
n euros [$22.1 billon] a month. In many
ays, the ECB and the Bank of Japan have
e same problem—they’ve used unconven-
nal policies and never really exited the ini-
l quantitative easing programs. Indeed,
pan introduced a super-yield-curve control
ogram, as well. When they do engage in
licy shifts, they have an eye on keeping
eir currencies weak as part of the reflation
rategy.
European authorities are looking to expand
e fiscal side. Europe gets unfair treatment
om investors, even though virtually all of the
uropean countries outside of France and
eece n c ent cco nt pl e o the
“Avery
Western,
consumption-
ledtypeof
stimulusis
beingintro-
duced[in
China].”
are rock-bottom, and governments are far
richer than they’ve been in the past 10 years.
When people voted in European elections
earlier this year, one of the most important
issues was climate. Green tech industries are
a very positive way of providing a populist
uplift with potentially very big multipliers for
the European economy.
Now that Hong Kong CEO Carrie Lam yanked
the controversial extradition bill, does that put
an end to the protests?
It was the major focus of the anger, so for a
lot of people, it’s the end of the problem. But
the other demands, such as investigating the
police response [as well as amnesty for the
protestors and direct elections for all lawmak-
ers] are unlikely to be answered. I don’t feel
there’s the political will to deal with it. Au-
thorities, both in Hong Kong and China, will
look to appease the protesters by applying
some populist measures. They will look to cool
the property prices in Hong Kong.
This isn’t a signal to buy Hong Kong assets, I
take it.
Correct. Hong Kong was fortunate because
while retail sales, tourism, and hotel numbers
were impacted quickly by the protest move-
ment, the financial system was extremely ro-
bust, and the U.S. Federal Reserve was on an
easing path. So rates remained relatively
subdued. Bear in mind that when the handover
occurred in 1997, Hong Kong’s gross domestic
product accounted for 18% or 19% of China’s
GDP. Today, it’s probably no more than 3%.
Over the past 10 years, authorities have made
an enormous effort to build what’s termed the
Greater Bay Area, an infrastructure linking
Shenzhen, Hong Kong, and Macau. That’s what
the Chinese authorities are really interested in.
They were keen to ensure that Shenzhen was
given the opportunity to have the same sort of
role as Hong Kong. The effect of the protests
was relatively small there, because a lot of
these other companies just aren’t influenced by
Hong Kong macro data, but by what’s happen-
ing on the mainland.
Has China lost face in this encounter?
There’s no easy answer. The Hong Kong leg-
islature was unpopular for other decisions
outside the extradition bill, including heavy-
handed new policies relating to land develop-
ment and reclamation projects. There are two
deadlines for China in terms of the resolution
of this protest. First, and most imminent: On
Oct. 1, China celebrates the 70th anniversary
of the founding of the People’s Republic. Chi-
nese authorities would not want to be embar-
rassed by any external protest.
And in 2021, President Xi Jinping and
China celebrate the centenary of the founding
dent Donald Trump is doing his utmost to
ease and make sure the U.S. economy is re-
ally juiced up for 2020, Xi Jinping has to have
the same occur with China’s economy in 2021.
Economists are downgrading Chinese growth
forecasts because of the trade war.
There are clearly defined political dates by
which they need the economy to be rosy. Peo-
ple argue that the Fed made a policy mistake
by raising interest rates in December. China
also made a policy error by introducing draco-
nian tightening measures for the banks to
address wealth management products and
account for bad loans. And in May and June
of last year, China experienced a credit
crunch—coincidentally, that was when the
trade dispute began escalating. So China has
two parallel problems: trade, and it over-
tightened. The Chinese authorities do need to
put a floor under the economy, because em-
ployment conditions have been deteriorating
for almost a year. Like the Fed, the People’s
Bank of China is very sensitive to unemploy-
ment numbers and job growth.
What kind of growth-revival plan should we
expect from China?
Again, there are quite interesting similarities
with the U.S. Last year, instead of doing the
normal fiscal pump-priming or infrastructure
spending, the Chinese authorities did a large-
scale overhaul of personal taxation rates, cen-
tered on lower-income households. Recently, it
did interest-rate reform that essentially
pushes the banks to bring down lending rates
to be more in line with the rates at which
they borrow from the central bank. That
would lower refinancing costs for small and
medium-size enterprises, and also bring down
mortgage rates. Very recently, the Chinese
authorities again announced that they will
review tax packages. A very Western, con-
sumption-led type of stimulus is being intro-
duced. And, as in the U.S., China has been
trying to bring down long-term rates.
Where are we in the global cycle?
There are a lot of similarities between what’s
happening today and what we experienced in
the late 1990s. Back then, central banks were
just getting accustomed to low inflation rates.
Today, they’re worried about deflation. The
U.S. today, like in the ’90s, was the major fo-
cus of global growth. The late ’90s spawned
the growth of the internet and digitalization.
Today, we have a very big sea change in the
frontier of technology applications, artificial
intelligence, and cryptocurrencies. And back
then, the Fed eased only to take rates back
up again. That could happen in this cycle. The
yield curve in the U.S. is not fully inverted.
It’s kinked around the five year duration and
nario we’re using for clients.
What are you advising?
That there are some pretty good, healthy
growth stories. One is sporting events in
Japan. There’s the upcoming Japan Rugby
World Cup and the 2020 Tokyo Olympics. Ge
erally, events of that magnitude produce dece
returns for companies involved in the brandin
of sports goods. Investors haven’t focused on
Our basket includes advertising and PR com-
panyHakuhodo DY Holdings[ticker: 2433-
.Japan], sporting-goods companyMizuno
[8022.Japan], tourism and leisure company
H.I.S.[9603.Japan], andMeiji Holdings
[2269.Japan], which produces nutrition bars.
Green tech is an easy win for politicians
particularly in Europe. Our basket includes
energy companyE.ON[EOAN.Germany],
wind-turbine companyNordex[NDX1.Ger-
many], andGEA Group[G1A.Germany].
What other themes do you like?
The degree of risk aversion in the financial
markets is quite unwarranted, given that we
have easing, and global growth is forecast to
come in at 3.2% this year, by no means a disa
ter. We’re not seeing evidence of big waves of
deflation. Wages are holding up pretty well
globally. The Fed has been cutting short rate
and long rates have come down so far that
mortgage refinancing will really kick in. You
know, 50% of 30-year mortgages in the U.S.
will be up for refinancing at these levels. I’d b
bullish on U.S. home-refurbishment companie
likeHome Depot[HD] and home builders lik
D.R. Horton[DHI]. We also have a crane,
digger, and excavator theme: Companies like
Caterpillar[CAT],Hitachi Construction
Machinery[6305.Japan], andKomatsu
[6301.Japan] tend to benefit when U.S. rates
are cut, because it feeds through to the emer
ing markets, which are all starting to cut rate
too.
What do you see differently as a strategist,
given that you sit physically in Hong Kong?
A few weeks ago, I looked up, and the PBO
had just announced it was shortly going to
publish its work on developing a digital cur-
rency, the e-yuan. What amazed me is that
China’s financial system, in many ways, is
still behind that of the West—but its big lea
in developing a digital currency puts it far
ahead of the Fed and other countries. For t
past 50 years, the U.S.’s big advantages in-
cluded the dollar and its economic scale. We
China can scale four times more than the
U.S. and is only just now trying to bring its
currency into the mainstream. A new eco-
nomic bloc is being created, scaling things t
unimaginable levels.
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