Podcast: A contrarian call on China

In a recent “Behind the Markets” podcast, we featured a discussion with Maura Pape, strategist and director of business development at DeepMacro. An innovative technology and research platform, DeepMacro provides interesting “factor” research for growth and inflation dynamics that inform asset allocation portfolios and models.

Pape was an intern for WisdomTree over a decade ago during her time at the University of Pennsylvania before she went to work for Morgan Stanley, then Soros Fund Management on its economics team and now DeepMacro.

Liqian Ren, WisdomTree’s new Director of Modern AlphaTM, also joined me in the discussion on her second day in her new role. In case you missed the announcement of Ren joining WisdomTree last week: Ren, who has a Ph.D. from the University of Chicago, was most recently a portfolio manager in the Quantitative Equity Group for Vanguard’s factor family of funds. Before running its active factor funds, Ren had a diverse set of experience, from economic modeling at the Chicago Fed to running multi-asset and managed payout portfolios at Vanguard.

For WisdomTree, she will be spending most of her time working on active factor-oriented investment strategies. We often discuss factors in the context of equity or fixed income allocations—with a focus on factors including value, momentum, quality and others.


Macro Factors

For DeepMacro, there are two important macro conditions for its asset class views: economic growth and inflation—both the levels and changes. It also uses risk models, which help inform tactical decisions the company is making in global all-asset portfolios.

One of DeepMacro’s specialties is a currency rotation program based on these macro models of growth and inflation that looks across all currency pairs—not just across with the U.S. dollar.

DeepMacro also has a global tactical asset allocation model that will form a view of five growth and inflation regimes that dictate the portfolio allocations across risk assets.

Pape described the current regime our economy is in as an expansion—which may seem counterintuitive based on the volatility seen in the markets in October, but that is what DeepMacro’s growth factors show.

The G10 countries have seen growth rates come down, but, overall, they are all rising and still above trend. Inflation has been rising generally, but not enough to make central banks take a lot more action, while risk indicators are in the middle of historical ranges.

The net conclusion is that we are not yet in a “late cycle” that would imply getting a lot more cautious, and DeepMacro would assign the most recent drop in the markets in October to stock valuations more than macroeconomics rolling over.

China Insight

One of the interesting parts of the conversation featured insights on China, a country where DeepMacro has interesting “alternative data” sources for gauging the health of the economy. One such alt-data source monitors satellite pollution data produced by NASA to get a much more real-time indicator of industrial production in China.

This, among other DeepMacro indicators, point to a less bearish view of China than current consensus, one that could be a bright spot for those allocating to emerging markets.

Listen to the full conversation with Ren and Pape.

Versions of this article first appeared on the WisdomTree blog and SeekingAlpha on November 20, 2018.

Photo Credit: Joe Hunt via Flickr Creative Commons

Disclosure: Certain of the information contained in this article is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. WisdomTree believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

About the Author: Jeremy Schwartz, CFA, Director of Research, WisdomTree Asset Management is responsible for the WisdomTree equity index construction process and oversees research across the WisdomTree family. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” Jeremy is a graduate of The Wharton School of the University of Pennsylvania and currently stays involved with Wharton by hosting the Wharton Business Radio program “Behind the Markets” on SiriusXM 111.