Stock-picking in Chinese, American and Middle Eastern markets

China’s economy is looking weaker than it has for decades

February 12, 2024, 1:23 PM

Construction in China. Fears about the country's real estate market are one reason Rajiv Jain's choice to move his stock-picking elsewhere may prove prescient

Just under a month ago, Rajiv Jain, a star stock-picker at Florida-based asset manager GQG, cemented his reputation for daring “contrarian” investments by effectively switching a chunk of his portfolio out of Chinese markets and driving instead – to the tune of $2.8 billion – into Middle East stocks.

Jain, who has made a lot of money in the past by investing in out-of-favour stocks such as Adani of India and Petrobras of Brazil, said he was attracted to markets in the Arabian Gulf because of their governments’ long-term plans to diversify away from oil dependency and their “business-friendly” approach.

The move raised eyebrows in the global investment world.

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What did Jain see in China that put him off so much? What does he know about Gulf markets to make such a big bet? And, if he wanted out of China, wouldn’t he have been better advised to go for the more stable and secure markets of the west, in the US and Europe?

With the S&P500 Index crossing the 5,000 point mark last week, perhaps the last question is most in need of an answer, which in turn boils down to another question: how much further can US and other western markets go?

Plenty, it seems. The Financial Times pointed out last weekend that, on historical evidence going back 70 years, breaching a big barrier such as the 5,000 mark was a prelude to double-digit gains in the following 12 months.

Market analysts, however, point to some variables in this bull market that were absent in the previous seven decades, notably the domination of US markets by the “Magnificent Seven” tech stocks – Apple, Amazon, Meta (Facebook), Alphabet (Google), Microsoft, Nvidia and Tesla – which together account for 30 percent of the S&P’s capitalisation and most of its gains.

If their bubble bursts, the bears argue, the rest of the market will collapse. Unpredictable, high-impact “black swan” events aside, there is little to see that could bring about such a disaster.

The other worries about US markets relate to inflationary and recessionary risks, and the fact it is a presidential election year in a combustible political atmosphere.

Whether Jain took these concerns into account when he made his big bet on the Middle East is not known – but his disdain for China appears well-founded.

China’s economy is looking weaker than it has for decades, fears about the strength of the financial and real estate markets are growing by the week, and Beijing policy-making is acting as a deterrent to foreign investors. Staying away from China is probably a sound call, at least for the time being.

But is the Middle East the place to relocate investment resources? Leaving aside for the moment the question of whether India’s flourishing economy looks a better prospect, there is a lot going for Gulf markets, as Jain has obviously recognised.

Diversification and privatisation, especially in the two biggest economies the UAE and Saudi Arabia, are proceeding apace.

“Business-friendly” infrastructure is attracting more and more individuals and corporations to set up in the hope of climbing onto the Gulf bandwagon in anticipation of participating in the boom – especially when economies in other parts of the world, especially Europe, appear stuck in a low-growth rut.

The market indices themselves look quite expensive, with the ADX in Abu Dhabi and the DFM in Dubai trading near all-time highs. There could be some way further to go this year for the Tadawul in Riyadh, some analysts say, as it is significantly off the peaks it hit in 2022.

Market sentiment in Saudi Arabia could be further stimulated in the near future, with the prospect of a further tranche of shares in Saudi Aramco being offered to the public via a secondary listing. The IPO pipeline elsewhere in the Gulf is also looking healthy.

Global markets and regional geopolitics, as ever, provide the real risk factors in the Gulf. Regional oil producers have chosen to rein in production, which has had a negative effect on their economies.

Saudi Arabia is in the process of pulling out of a short shallow recession that was caused by low volumes of oil exports. The UAE is still sitting on expensive extra capacity and must decide what to do about that at some stage.

Will Jain’s bet turn out to be a winner? We shall see.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia