Louis-Vincent Gave: The World’s Most Crowded Trade
May 12, 2015
by Robert Huebscher
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Investors are paid to adapt, not to forecast, according to Louis-Vincent Gave, and three changes are occurring globally that all portfolios must accommodate. One of them is a position that is missing from virtually every investor’s allocation.
Gave is a founding partner and the chief executive officer of Gavekal Dragonomics, a global research and money management firm. He spoke at the Strategic Investment Conference on April 30 in San Diego, an event sponsored by Altegris and John Mauldin.
“The world’s single largest crowded trade, the crowded trade that everyone in this room has bet on and doesn’t even realize you’ve bet on,” he said, “is the absence of China in your portfolios.”
The reason is that China has no allocation in the global bond indices or in the MSCI world stock indices, he said. Even though China’s stock market has doubled in the last year, Gave gave compelling reasons why investors should be bullish on its stocks and bonds.
I last wrote about one of Louis-Vincent Gave’s talks in 2010, when he predicted that Asian economies would grow faster than the U.S., but its equity markets would underperform the S&P 500. Over the last five years, the MSCI Asia Apex 50 is up 46% in U.S. dollars, versus 86% for the S&P 500.
Let’s look at Gave’s three adaptations investors must make to properly position their portfolios and why he believes China is a compelling opportunity.
The collapse in oil prices
To justify the halving of oil prices in the last six months, Gave said that two things must have occurred: a profound shift in the supply-demand curve and an overhaul in the Chinese political landscape.
The increase in supply – from the American fracking industry – was not a surprise, Louis-Vincent Gave said. He said the “whole peak-oil thing was hogwash” since new supplies were being uncovered throughout the world. Gave said that oil was one of many commodities that were in a bubble, and the bubble burst because of what happened in China, particularly over the last year.
The arrival of a “new extremely ruthless leader,” Xi Jinping, was the tipping point, according to Gave. Jinping transformed the way China interacts with the commodities markets.
The telling sign was in June of last year, when Jinping struck a deal with Vladimir Putin to purchase Russian natural gas at 40% below-market rates and to pay for it in renminbi.
“China at the end of the day is the marginal purchaser of energy and most commodities in the world,” Louis-Vincent Gave said. Before Jinping, China was a “price taker” in the market, Gave said, letting trade terms be dictated by its partners. Now, with this deal, it became a price maker.
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