The crew at Bespoke Investment Group posted a chart noting the divergent paths taken by the S&P 500 and the Shanghai Composite. The extent of the divergence has ebbed and flowed before, and year to date they seem to be moving in different directions.
Last week I disclosed selling China Mobile (NYSE:CHL), leaving us with about 0.65% in China via themed ETFs. I don't plan to be away as long as I was starting in Q2 2007 but for now the ETF exposure is it.
The chart at right (click to enlarge) makes a critical point about what to expect when investing in a country or theme. Whether you are on board with the long term merits of investing in China or favor some other country or theme, it will not always be right for the shorter term.
China is no less valid today than it was on January 1st. All of the various risk factors that are written about today have been around for months. Really big, long term concepts don't change week to week very often, if ever.
Obviously I think occasional tactical tweaks are appropriate, but for anyone not comfortable with that sort of thing it is important to realize that the fundamentals of a big macro theme are not washed away because that theme lags other markets for a while.
From 30,000 feet, if you own China you believe it will become increasingly more important in the global economy and you expect that to be a tailwind for stocks. That type of thesis could easily be a 10-year concept and over any length of time even the right theme will have periods where it struggles. If you take the time to look at the countries I write about most - like Brazil, Norway, Chile, Australia and so on - you will see that most of them clocked the S&P 500 in the last decade but there were plenty of short time periods where they lagged meaningfully.
What I think happens, in the context of people not wanting to make tactical trades around a theme, is that people second guess themselves when a theme they favor does struggle for a bit. After two or three months of lagging it is easy to think something is wrong with the analysis, so you lose patience and pull the trigger.
I think back to that nugget from Montier from last week about the long term being a huge advantage that investors have over traders.
Not to contradict myself too much, but it has to be said: we all will end up being wrong about a theme or country at some point. Or, we may be right, but then the theme plays itself out and no longer holds. So investing is not easy, apparently, and it comes down to how well you understand the theme in question. No matter how well you understand something you can always understand it better and through ongoing monitoring you can hopefully have a sense for when something really has changed and when it is just a market thing.