What caught my eye during this past week & what I'll be watching during the week ahead (August 2 - 8, 2021)

This was a busy week w/ a lot of developments I want to journal about so let's jump right into it. The big narrative moving markets this week is the one that I journaled about last week- China's seeming crackdown on firms listing overseas. I already disclosed that I try to limit my direct exposure to Chinese securities foucsing more on the corners of the world where I am more confident in my ability to understand & anticipate market moving developments- but China is the elephant in the EM space and what is going on China has a tremendous impact on not just emerging economies dependent on commodity exports but the global economy at large. So even if I'm not buying chinese debt offerings or RMB I of course closely follow developments there & I'll link here articles & jornal entries I think provide insight & I'll want to come back to. With that said let me add one quick thing before I link to a couple of smart pieces I read on China this week. My unsophisticated, almost certainly underinformed, read on what we are seeing in China is pretty much this: there are situations in which the priorties of the Chinese government & the international investment community are in harmony- when that happens international investors do fabously well; however there are also times when two parties interests' are not in perfect harmony. I don't think this is an earth shattering insight by any means. And whereas the international investment community might expect certain type of behaviors from a sovereign state, China, again having different priorities/challenges than other states they are used to dealing with takes different action than other states (i.e. lifting hundreds of millions out of rural poverty). I'm not making moral judgment here*; I'm just stating a positive statement. When China is facing an opporunity to subsidize an important industry that is integral to the global economy & keep the wealth generated from it recirculating at home with the tradeoff being that non well-connected nationals & foreigners would suffer a say 10% hit to the potential market cap of a significant enterprise they are shareholders of- the Chinese government is going to make that trade-off every single time. Simple as that. Said shareholders may not like it but that's the rules of the game. And it behooves investors to understand that when adding exposure to Chinese securities. Anyways, lots of people on twitter linked to this interesting essay that offered a much more sophisticated take on what we are seeing in China & its strategy re: tech regulation. It's definitely worth a read. https://lillianli.substack.com/p/let-the-bullets-fly-for-a-while . Also, earlier this afternoon I read this excellent essay in Foreign Affairs that is definitely worth a read as well (h/t Cardiff Garcia) https://www.foreignaffairs.com/articles/united-states/2021-07-29/chinas-sputnik-moment

Peru- It was a very eventful week in Peru. To sum it up it began with incoming President Castillo naming his choice for Prime Minister (who the markets very much did not like) & it capped off with him naming his choice for Finance Minister (who the markets were very happy with).  During a rocky week of trading both stocks and bonds sold off & we saw the Sol drop to a new all time low vs the Dollar, 4.068. However, if my twitter feed is any indication we should see a healthy rally across all 3 when the markets open up in a few hours. I'll go into a little detail about how I played this when I go into detail on my ongoing trades at the bottom of this post.

Brazil- Thus far I've only been posting my open trades that I have in my pa but if I was managing a portfolio Brazil would very much be part of the picture. In the coming week I'll go ahead and construct my theoretical portfolio- if anything it will be a fun and useful exercise in portfolio construction. Anyways, this chart that Robin Brooks tweeted out caught my attention. https://twitter.com/RobinBrooksIIF/status/1419794632574124032 There are two possible explanations for this 1) Locals know something the rest of us don't know. 2) Locals that are disturbed by the Bolsonaro regime are pushing down the real. I'm inclined to go with #2.

Turkey- Fading the Lira is a trade on I've had on for a pretty consistent basis since I started doing this circa 2014 (and it's worked out pretty darn well!). However I must say that if I were managing a fixed income book going long Turkish assets is very much a play I would be putting on at various strategic times just out of sheer neccessity. Turkey, like Argentina, is of the few corners of the world where active managers really can justify their existence & out perform the benchmarks they set themselves up against because of the yields on offer. The tragedy of Turkish economic performance over the past decade is that even if the fundamentals aren't as promising as they were in the first decade of the century they are still quite promising but just that the policy makers just can't quit getting in the way and mucking things up. I mention Turkey this week because the one of those opportune times to jump into Turkish assets would have been after the April sell-off. However, the images from the wildfires from the past few days are brutal and paint a pretty bleak situation. My first thoughts are with the residents and their safety. However, for the purposes of this exercise I want to document that I anticipate Turkey will very much see a large # of tourists cancel their planned trips over the next two weeks, depriving the country of some very much sought out hard currency it is seeking to restock its foreign holdings. Definitely useful to make note of and it might provide a buying opportunity if the market is disappointed when the official #s come out and concerns grow about long-term growth prospects.

Open Trades

1) South Africa- No change from last week. I'll keep monitoring the situation but my view this is still a 1-3 month hold from here.

2) Mex- Mex was very much overshadowed by the news in China and the developments in South America. I'm still bearish over the short term and we saw in the week prior the market narrative coming around to my view. 

3) Chile/Peru/Col. Alright so I added to my Peru position throughout the week during the course of the sell-off. This play was always about the soundness of the economic fundamentals in the short-medium term and the economic tailwinds are still significantly > than the headwinds. Exports Balance of Trade These figures do not reflect an economy meriting a sell-off in assets. I understand there is a lot of apprehension of who Castillo tapped for his cabinet among the elites. There really isn't all that much to go glean on the periphery figures in both the Spanish & English language presses. However, incoming Finance Minister Francke is at least rhetorically sending the right messsages on respecting the roll of private enterprises & markets. And incoming PM Bellido is not adopting the hostile posture towards him that many were fearing. 

What I'll be paying attention to during the week ahead. 

1) Peru releases economic data on Thursday

2) The Economist cover story for this week is on EM and specifically on EM growth concerns. Considering that narratives surrounding growth outlooks is the strongest driver of returns in the space I will very much be paying attention to see if there are any shifts in sentiment that result. (I know that in the case of Brazil there are some who like to playfully consider Economist covers as a contra indicator). At the end of the day the Economist is a pretty damn good publication &, more importantly, is still pretty influential and one of the few publications that really can move markets.

3) Obligatory reading of Howard Marks's latest note. Marks

*I cannot in good consicence mention the Chinese government & moral judgments without forcefully condemning the horrific treatment of the Uyghur people in Xinjang province. Despite the fact that one of the reasons I set up this blog was to one day show to future employers & it is very much not a good idea to be voicing condemnations of state governments to future employers I am compelled to do so. I trust that any potential future employer will trust the objectivity I bring to my analysis & not hold this against me. This is an issue that is deeply personal to me. I do not carry naieve expectations that we will be able to prevent the unjust treatment of our fellow neighbor in each and every instance. But the community of nations has made a vow that there is a line that must not be crossed. That line has never been explicitly defined. But wherever that line is, the treatment of the Uyghur people should be considered a violation that the world community strives to put an end to.