Is China a Fat Pitch Opportunity with Brendon Ahern
Brendan Ahern, Chief Investment Officer, KraneShares, uses his extensive knowledge in index methodologies to focus on the emerging market in China, which he proposes has not been properly represented and looks to be full of opportunity. Don’t miss this one as Brendan discusses his investment approach as it relates to China and emerging markets.
Is China a Fat Pitch Opportunity? Let’s dive in and you decide.
RECORDED JAN 20, 2023
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Brendan Ahern: 0:05
Within MSCI All Country World Index, the US has almost two thirds of the benchmark, China's 4%. And so I don't think people are thinking about the last decade is probably not going to look like the next next day. And that's where, you know, we think you got to kind of balance things out a little bit. There's an opportunity in some of these unloved areas such as China.
Paul Barausky: 0:32
Hello, and welcome to the fat pitch Podcast, the podcast where every week we bring you interviews with thought leaders, legends, luminaries, and even a few lunatics from the world of alternative investing. I'm your host Paul Barausky chief distribution Officer of Sealy investment securities and every week I'm joined by my co host, Clint Sorenson, founder of wealth shield. What do we mean by fat pitch podcast? Well, I bet everyone's heard of Ted Williams, one of the greatest baseball players of all time, Ted famously described his approach to hitting as waiting for the fat pitch. What he meant was that he would only swing it pitches that were in the strike zone, and were exactly where he wanted them. In other words, he was willing to be patient and wait for the perfect opportunity to take action. Williams knew that swing at every pitch, even those outside the strike zone would result in a lower batting average and missed opportunities. But by waiting for the fat pitch, Ted was able to maximize his chances of success. And he certainly achieved extraordinary Hall of Fame results. That philosophy can be applied to many areas of life, including investing where Warren Buffett, the legendary investor and businessman also use the term fat pitch to describe his approach to investing. Just like hitting he believed that the key to successful investing was in is to wait for the right opportunity to come along and wait for the perfect Fitch. In Buffett's view, a fat pitch was a rare and undervalued investment opportunity that had the potential to generate significant returns, he would wait patiently and still does for these opportunities to present themselves and then take decisive action when the time was right here at the fat pitch. As I mentioned, every week, we're gonna have a chance to chat Clintonite with fantastic minds from across the spectrum of investing. We don't know if it's the fat pitch, perhaps they're gonna suggest to us that it is time for the fat pitch. But I think you're gonna have a lot of fun as we do each and every week listening and talking to some of these terrific opportunities, and we'll find out is it a fat pitch or a ball outside the strike zone? Well, hello, everyone and welcome to this week's edition of the fat pitch podcast. I'm your co host Paul Borowsky chief distribution Officer of Sealy investment securities. And I'm joined by my co host,
Clint Sorenson: 3:02
Clint Sorensen, how are you? Thanks, Paul. And great to have everyone. Yeah, yes, it's awesome to have everybody here. And we're joined by Brendan Ahern from crane shares. So Brendan is going to talk to us about that pitch investing in why China just may be a fat pitch. So we pop up your bio there, Brendon. And then we'll get into some good stuff here.
Brendan Ahern: 3:22
Yeah. Thank you, Paul. Thank you, Clint, for the opportunity.
Paul Barausky: 3:25
Absolutely. It's a pleasure to have you here today with us. I know every conference, every place I've been lately, China's nothing less than a hot topic, maybe at the top of the list. And it's nice to have an expert with us here for our audience. Yeah, it's
Clint Sorenson: 3:38
pretty phenomenal. So Brendan, start off give us a little brief background about you, you know who you are. Yeah. How did you get involved in investing in general? And then, you know, let's start talking about your investment approach. And in particular investment approach to China.
Brendan Ahern: 3:51
Yeah, I've always loved investing. You know, my father is an incredible reader. He from an early age was always had I was reading The Wall Street Journal, I just kind of picked it up. And when I was 14, I read Peter Lynch's went up on Wall Street and went and bought my first stock that promptly went bankrupt. But yeah, I was a little kid I bought TCB why right it's by what you know, as I love ice cream who doesn't and I didn't, you know, is a tough foray. But yeah, ultimately, ended up post-college working for Barclays Global Investors moved from New York to San Francisco, they were going to do this thing called exchange traded funds, and they were going to call an iShares and had the total dumb luck have been ended up being like the 20th employee dedicated to iShares as soon as rolled out and spent 12 great years with iShares part of Blackrock after they bought BGI and iShares in 2009, but ultimately, you got introduced to Jonathan crane, he talked about you know, his experience living and building a business in China and he kind of said, hey, I want to build this ETF firm gear to China, I was like I can I can do that for us. So, you know, kind of my father was an entrepreneur, small business owner, and I was Say, Hey, I know he's worked for these big companies, I want to go do something like that. And so I had the privilege of helping make John's vision investable. 10 years ago, and like any small business, there's pretty tough going and the early days, but lo and behold, through a lot of hard work, good luck. Ukraine shares has really become, you know, 10 plus 10 $11 billion in assets under management say knock on wood.
Clint Sorenson: 5:24
Yeah, I mean, what a phenomenal story. I mean, what an incredible growth trajectory and you guys have just accomplished so much and and I think it's amazing. Now you're on CNBC a lot, too. So you're a frequent commentator on CNBC are among other media. So you really are this go to China expert. So I want to dig deep into what this whole podcast is about Paul and I had this idea, we've been doing a monthly series together, we had this idea, hey, let's interview people who have really specialized knowledge on certain areas within the investment landscape, but also other things, right, that could end up being called fat pitch investing. So what a fat pitch is, is it comes from the Warren Buffett theme, where he said, Look, our approach to investing is really like the Ted Williams fat pitch styles, except we don't strike out, we just wait and watch as many pitches as possible. And we swim,
Paul Barausky: 6:14
we can take balls all day long. That's the beautiful thing and cleanse right, we really said to ourselves, hey, let's talk to luminaries, legends and thought leaders in everything from cold storage to cannabis to China and everything in between, and really drill down on what's your investment philosophy? And frankly, what's your approach to managing and making money and really specialize in those areas, and then let folks determine for themselves if that's a fat pitch. So we're never here to talk about returns necessarily, but to talk about philosophies. And so I'd be curious, not having known you for that long. Really, what is your basic, you know, overlay philosophy, if you will, underlying philosophy? I guess better?
Brendan Ahern: 6:56
Yeah. I mean, for over 20 years now, I've been a student of index methodologies, which sounds like a cry for help. But you know, the index provider like MSCI, you know, their global investable market index methodology is arguably the most important book in finance because it dictates 15 trillion of both active and passive assets, and, you know, who's read it, and no one? Right. And, you know, I would just argue that these index methodologies have intricacies and, you know, a big one, I think that's out there, as you know, a lot of investors say, you know, non US stocks, em, China's out of favor. And if you just looked at the numbers of the s&p 500 versus MSCI Emerging Markets or MSCI, China, since the global financial crisis, you'd say yeah, you know, s&p is up like 500 eams up not even 100 You know, China's up 50 But this is where you got to kind of look at what is the composition of these benchmarks? Well, you know, MSCI Emerging Markets and MSCI, China over 50% financials and energy. So we go into the greatest decade of growth investing. And the definition for em in China was basically value stocks tech within MSCI Emerging Markets 11%, MSCI China Tech was 2%. And now the problem is MSCI China tech went up like 2,000%, actually, you know, ran circles around that, but he had no exposure. And so the element of you know, my leaving Blackrock was saying, like, listen, there's little things we can do better. And particularly around like China and emerging markets where the growth part of China the growth part of em has not been properly represented, in my opinion, and that's what crane shares does for investors, we give it that growth orientation.
Clint Sorenson: 8:53
That's awesome, too, because it's such a funny that devil is always in the detail, but I remember looking at in 2021 What financials and health are with tech and healthcare made up of the MSCI All Country World Index, it was like 44%. So to hear that MSCI China only had 2% in tech,
Paul Barausky: 9:11
right? You're saying 44 versus too big of a spread? 42%? Yeah, I'd say that's more than nominal.
Clint Sorenson: 9:18
Yeah, it's amazing. Now that was healthcare and tech still, if you look at that, that's significant concentration relative to how the MSCI index so you're not comparing apples to apples to your point. Yes. Appreciate that. Let's talk about where do you see the opportunities today? You know, let's talk about that within the context of China, and why you think China may be a fat pitch.
Brendan Ahern: 9:38
Yeah, I think, you know, if you look at the four big opportunities between like, say, China, US equities, European equities, Japanese equities, right. You know, the China is coming out of an economic trough you know, this reopening is going to be a real thing, you know, World Bank saying 5% GDP growth. growth for 2023. You know, us is basically zero, Europe is zero, Japan is one. But I think more importantly, if we think about fiscal and monetary policy in these four regions, you know, China, you know, they're easing, you know, they're putting liquidity into the financial, right, so, so you have money supply growing in China, you have bond yields actually falling. And then you have that against the backdrop of in China, you know, CPI is less than 2%. The P e is below the historical average. And we can just contrast that with these other markets, you know, USA, Europe, Japan, where quantitative tightening money supply is shrinking, bond yields are rising inflation, it's coming down, but it's still high. And then against the backdrop of not, you know, above average valuations, and we're not rooting against these other markets. It's just simply saying, You're, I think Clinton a lot, you know, within MSCI All Country World Index, the US is almost two thirds of the benchmark, China's 4%. And so I don't think people are thinking about the last decade is probably not going to look like the next decade. And that's where we think you got to kind of balance things out a little bit, there's an opportunity in some of these unloved areas such as China,
Paul Barausky: 11:29
I have a couple of questions being far less learned than Clint. And certainly the chasm between us monumental question is, if you read, let's just call it mainstream media, they want to convince us that COVID will be now the number one export out of China. And he concerns about the impact there, I kind of look at it as just the numbers thing. Of course, the numbers look big, because you're talking about sheer population size. And the other one is, I had not looked at the growth of consumer debt in China, and then somebody brought it to my attention just this week. Any thoughts around those two subjects?
Brendan Ahern: 12:03
Yeah, I mean, you know, China's this abandonment of zero COVID, you know, an element of that is that it is OMA cron, which has less lethal, you know, less lower lethality rate than other, you know, other variants. You know, and obviously, I have no medical background, so, you know, take any sort of medical advice for the tricks. So I think that's an element of that, you know, it's going to have an effect in China. And then I think an element of that is just simply, you know, they gotta get their economy going, right, that as the global economy slows demand from the world's factory is going to slow, they gotta raise domestic consumption, on household debt, you know, it's interesting, you know, you know, the where deaths come from in China, it's been a real area of focus and households, it has increased because, you know, the older generation, you know, my father was born in 1929. And, you know, he has a Great Depression, World War Two mentality of, you know, you save everything, and the younger generation, you know, my mom is a baby boomer, and a very different mentality. And in China, that's kind of the case. So, you know, if you grew up through the Great Leap Forward, you're a saver, the newer generation, you know, more willing to, you know, have a credit card. So, your net net, you know, I think the key is interesting, you know, deposits in China 21 to 22, double about as a trillion us more money in bank deposits in China, because of the concerns of zero COVID You're being locked in your apartment, and in some element that's gonna go back into the consumption space. You know, that's our belief for 2023.
Clint Sorenson: 13:40
Yeah, great. Thank you. I love how fascinating the story which you nailed the front end, right? It's completely polar opposite. Let's just compare the US. US has a growth, slowing environment, inflation slowing environment with tight monetary policy, right, market trends have been mostly neutral kind of shifting positive in recent times, but really, they weren't bearish prior to, you know, really fourth quarter. So now you've got this environment with complete opposite. You've got, like you said, an improving economic situation. So maybe talk about some of the data that happened this week that I saw from your morning report, right, seeing improvement, the data, you have low inflation, it's really disinflationary environment, maybe reopening creates some acceleration, but you have stimulus moving in the right direction. So like all the precursors to growth, like you mentioned, are really in favor of that Chinese story now. So what have you seen in the data front is kind of showing you that maybe this is not a flash in the pan?
Brendan Ahern: 14:32
Yeah, I think, you know, the earlier the indications are that, you know, domestic travel, and China's come back almost back to pre COVID levels, international travel is going to be a little bit slower. You know, Russia is not allowing foreign airlines to fly over, but you're gonna see, you know, this huge human migration during China's new year, and they're gonna get out there back after it from a consumption perspective. And I think, you know, we're going to enter into earnings season In four Chinese internet companies that are kind of the transmission engines for domestic consumption as it happens online. Yeah, the data, Clint, you know, said that, you know, retail sales in China declined by a small amount in 2022, but actually increased for online. So we love e commerce, we love the domestic consumption story. And I think ultimately, there's a lot of skepticism, there's a lot of scar tissue, there's a lot of controversy when you mentioned China. That's a little bit of our thesis of why the pain trade can be higher, you know, that there's a lot of money isn't been focused on some of the things we've been focused on.
Paul Barausky: 15:38
What challenges are out there that you see at the forefront to really, you know, challenge China's ongoing growth and dominance?
Brendan Ahern: 15:47
Well, I think real estate's been an area of concern your that the government, you know, has been all over issue of distressed property developers like Evergrande, and Country Garden and others and trying to prevent, you know, that first domino from going at the same time property prices is actually declined. And for people kind of our collective age in China, you've never seen a property prices actually drop. Two thirds of urban household wealth is in real estate. And so that decline actually hits the balance sheet of households, which it wasn't just zero COVID Real estate is part of the reason you saw this huge influx of money into bank accounts. In some ways. There's not a lot of mystery that China from a government, the government is about stability. And whenever you think about things, you just had to put it as does that create instability, or increases stability? And so the government is all over this real estate situation, obviously, zero COVID The potential unfortunately for the unvaccinated amongst the elderly is unfortunately, you know, a potential problem. You know, we've been I've been concerned about Taiwan, which, you know, it's kind of non consensus. But I think a political mistake, you know, is still, that there's a element of, you know, that wants to kind of stick it to China. And if that's your concern, it's not Chinese equities, you should worry about I always say, you're 17% of Apple, that revenue comes from China, you know, 12% of Exxon Mobil, you know, 27% of Intel revenues, you know, then that's besides the Boeing's Caterpillar, John Deere, you know, a lot of us multinationals have done really well in China, and you're far more exposed to US equities. That's what you should worry about.
Clint Sorenson: 17:38
That's a good point. Definitely. And I think to continue to talk about this, because I think the challenge is, Paul, to your point of really important to kind of think about, but there's really two camps out there. I'm talking China longterm. Right, so there's the bullish camp, the Ray Dalio, if you read his book, he talks a lot about China's rise as the dominant empire, right, they're kind of next in line, they're the one accelerating the US is kind of decelerating. And then you have Peter Z hands work, which is extremely bearish, China due to demographic situation. And I'm gonna pull up an article real quick that came out this week. And I want to get your thoughts on this. Because this does seem like, you know, it's a real threat, but they can mitigate a threat. So let me pull up this
Paul Barausky: 18:17
and be careful, Brendan, whenever he starts to pull things up, or draw on a whiteboard, all the work we do together, disaster could ensue.
Brendan Ahern: 18:26
Appreciate that, Paul, I got this, my
Clint Sorenson: 18:29
friend. So I'll read this is from this week. And you saw this news, right? So China's population decline? Yeah, first time in 61 years, that's really the Hansel thesis is that the population probably peaked, you know, 10 years ago. And by 2050, he's estimating that the population would be down to 600 million. And so when you start to think about what that does to industrialization, what that does to, you know, just growth rates in general, you start to get this, and this is a global phenomenon. This is not just picking on China, we're talking about China. So I'd love your thoughts on that. Because that's really a big, you know, negative piece, or that I hear that at least makes sense, a big negative kind of opposing view. So I love your thoughts on what you think about population growth. And
Brendan Ahern: 19:11
I think in the West, you know, there's a lot of reaction to crises, you know, you have a mortgage situation that builds up in Oh, wait, and you know, totally implode. And there's a reaction, right. And the Chinese government, you know, because of this emphasis on stability is always thinking like, what could happen? So, like, you know, a few years ago was shadow banking is going to blow up China, and they basically put that industry out of business, or it's whatever grands gonna be the first domino, China's Lehman. And the government came in and put them on life support, you know, you're just for doing this. There's always something I would say, Yeah, it's true that if you take the current birth rate and take that little XL and just drag it right, you know, in 100 years, they're half their size. The Chinese Government is very aware of this issue. And you know, I actually think, and I've been trying to figure this out, I'll let you know when I do. But as Chinese government's going to do something about it, there's not been a good indication of what those tea leaves, you know, kind of look like, like, what is the answer? But I think you're just to your point, Clint, it, this is not an issue, you know, China's highly urbanized right 70% of the people in China live in cities. And if you look at South Korea, Japan, Italy, like Manhattan, it's hard to have you live in a two bedroom apartment anywhere in any city, it's hard to have like three kids or four kids or five kids. I've thought a lot about, you know, can you name a city where people have been a whole bunch of kids and they live in like apartment buildings.
Paul Barausky: 20:52
I couldn't say Salt Lake, but I'd take the apartment part out. But I also think you could replace China in that with about two thirds of the developed countries that we talked about, and undeveloped as that. Let's just face it, societies move towards less offspring. I mean, Clint, we could have a whole nother debate about one of the things Russia really wants is Ukraine's younger population. And we've had that discussion before, and a whole host of other places. So I would tend to concur with you on that. That's kind of a natural evolution of that societal economic growth. Yeah, yeah,
Brendan Ahern: 21:26
for sure. And I think, you know, for me, you know, from our investor base is very global. And, you know, I've thought about Jerusalem. Jerusalem is a city where people have a lot of kids and property developers build buildings that allow for families to have a lot of kids. And I think, you know, the Chinese government should tell the ever grants a country like, hey, like, we're gonna create suburbs, you know, because China doesn't have suburbs. You know, everyone is, you know, they call it vertical peasants, right? Everyone lives in apartment buildings. And, you know, I've got three kids, I live out in the suburbs outside of the city. And, you know, China doesn't have that. That's the solution, you know, create four bedroom apartments and say, you have three kids, the apartments free, I bet you people start cranking out kids. I think the view that your show often people say, you know, China's on a set of rails, and they can't deviate. You know, they deviate all the time. And you know, President G, you know, like any good politician adapts to change. And this issue, they will adapt, nothing explicit, but it's common, it's common.
Clint Sorenson: 22:37
You know, it's funny, you say that, because it is linear thinking, just to think that there's no other variable, there's nothing I can happen to kind of alter that course. So appreciate your thoughts there. Let's do a final thought final kind of closing. Watch as at that pitch, I think you did an excellent job. It's yours
Paul Barausky: 22:53
next week. Can I ask a question, since you're much more of a market technician and I tend to think demographics, bigger picture. I also always joke with Clint, when I went to you can see where I went to school, obviously, for those of us on camera at Penn State, Clint knows I was in half of the class that made the top half possible. So I tend to like to ask the more basic question for the listeners that appreciate that. I heard a lot about and you alluded to it, some really good Chinese tech names that not just downs, 50%, not 70, but 90%, you know, 85%, real staggering numbers. So my thought there is luck. We're not here to make recommendations ever individual companies. But do you see a big beyond a dead cat bounce? Do you see real upward momentum for you know, a great number of these companies and the near or mid future?
Brendan Ahern: 23:52
You know, what kind of hurt me personally, financially was focusing on the fundamentals of these companies, which didn't decline. And you know, you listen to these quarterly calls over two years, and it wasn't the end of the world. And, you know, I was very early and don't take my market timing advice, because I did terrible. But, you know, ultimately, what I realized was, you know, these stocks were disconnected from fundamentals that it was the trade war, it was the tech war. It was, you know, the potential delisting of Chinese stocks. It was a global pandemic coming from China. It was China's internet regulation. It was US political Barb's and visiting Taiwan. So you had a lot of institutional investors went underweight the stocks, you know, short sellers, if they know there's no one protecting a name, you know, you press that short and it's like hitting an air pocket in an airplane, you know, if the Calvary is not coming shorts can dictate the narrative. And, you know, I think that's why you had this huge downdraft that really exceeded anything fundamental. And I think that's why, you know, we can get a swing back.
Paul Barausky: 25:07
He's really good insight for someone like me, I appreciate that.
Clint Sorenson: 25:10
And these companies are so cheap relative to like us tech, right? When you look at it like a valuation differential, it's amazing what you can pick up over there. And they're huge. The companies are massive, like when you compare him like customer counts to like, users, and once you have here in the States, I mean, obviously, it's a population differential, but it's massive.
Brendan Ahern: 25:30
Yeah, I mean, it's almost a third of retail sales, less restaurants and autos. happens online. That's the opportunity set, you know, you got to urban middle class that's still growing and you know, they're consuming online. And that's the opportunity for our biggest belief, right. And yeah, it's, you know, knock on wood, right.
Clint Sorenson: 25:54
Well, Brendon, we can't thank you enough. I'm just really appreciative. Brendon that you jumped on. You are our guest today. We'll definitely have you on in the future as well. And look forward to you know, talking China more, but you heard it here, Brendan.
Brendan Ahern: 26:06
None of thanks so much, Paul. Thank you, Clint. It's a real pleasure.