Apocalypse Now? Maybe Later, Probably Never
Cam Hui | Jun 16, 2014 12:23AM ET
I have been thinking about the kind of tail-risk posed by sudden events that could tank global risk appetite and therefore the financial markets. My conclusion is that the so-called tail-risks are wrong and the immediate threat posed by tail-risk is lower than the market thinks.
Let me explain. There are three sources of event risk that could cause the markets to swoon:
- Iraq
- Russia-Ukraine
- Chinese financial crisis
As I go through this analysis, bear the following in mind. Don't consider the event through a geopolitical lens, which could be potentially serious, but through a market lens. For the purpose of this analysis, it's important to be politically agnostic and think about the potential market impact of the event.
h2 The threat from Iraq/h2Let's start with the freak-out du jour, Iraq. Andrew Critchlow of An New China-Old China pair trade ). The New China basket (Golden Dragon Halter USX China (NYSE:PGJ)) consists mainly of shares of companies exposed to the Chinese consumer, while the Old China basket (iShares FTSE/Xinhua China 25 Index (ARCA:FXI)) is tilted towards the financial sector, which has been the instrument of past government policy to stimulate the economy via credit-driven infrastructure growth.
Note how the Old China basket has been rallying against the New China basket since the pair bottomed out in March:
Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.
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