The following is the first installment of a paper written by co-CEO and Executive Director of Trading Barry Goodman on China. Here, Mr. Goodman provides historical context and some considerations related to the current socio-economic and geopolitical backdrop. He later makes a case for why there can be opportunity in uncertainty and why investors need to keep China in the consideration set. A link to access the full paper is available here.
Please see important disclosures appearing here.
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By Barry Goodman
co-CEO and Executive Director of Trading
There is an old Chinese parable about a farmer and his son. It describes a series of events that could impact the family in good or bad ways. First, the family's lone horse escapes its stable, a seemingly devastating loss until it returns the next day with six other horses. Then, the son falls off one of the horses and breaks his leg. This appears to be an unfortunate development until an army general visits the next day, looking to conscript all of the village's young men—everyone except the farmer's son, of course, whose broken leg makes him unfit for battle.
The farmer's neighbors gathered around to celebrate or lament each incident, quickly drawing their most logical conclusions. The family's horse escaped the stable. "Oh no! What terrible news!" It returned the next day with more horses. "Oh wow! What a lucky break!" But the farmer resisted the urge to similarly opine, instead responding to their proclamations with a simple, "Maybe yes, maybe no."
Everyone derives their own meaning from this story. Some view it as a lesson in withholding judgment on the tragedy or triumph of certain developments. Others offer a more Stoic interpretation of moderating emotional responses to events beyond one's control. For us, it speaks to the wisdom of taking a dispassionate approach to complex problems. Solutions do not always come with clearly labeled paths. And “making room for maybe” can reveal opportunities that often exist amid disconnects between perception and reality.
"For us, [the story] speaks to the wisdom of taking a dispassionate approach to complex problems. Solutions do not always come with clearly labeled paths. And “making room for maybe” can reveal opportunities that often exist amid disconnects between perception and reality."
Barry Goodman
co-CEO & Executive Director of Trading
China is a complex nation, and interaction with China represents one of the most complex issues facing the world today. It is the quintessence of a concept we recently wrote about called VUCA, which stands for Volatility, Uncertainty, Complexity, and Ambiguity. Chinese capital markets have historically been characterized by heightened volatility. The path forward in macroeconomic and geopolitical terms is indeed uncertain. Accessing onshore markets is rife with complexity. And China is no stranger to the notion of strategic ambiguity.
Consequently, many businesses are currently engaging in a form of selective abstention regarding China. This is understandable. VUCA-inspired headlines concerning the country are commonplace today, so the easy call is just to avoid it altogether. Most of us suffer from some degree of ambiguity aversion, tending to prefer known risks over unknown ones. Investors often treat China as just a trade, allowing for a simple calculus that rests on a binary approach. Exposure decisions about degrees of long or short can be easily reduced to just in or out, go or no-go.
Some situations are more involved. For example, private equity groups with a presence in China rely upon an accommodative operational and macroeconomic backdrop. The muddling of those two pictures can present an existential risk for such firms. But some of us embrace the chance to operate within such complexity. This is especially true for groups like ours, which have witnessed over five decades of market events, spent years navigating China's regulatory framework and partnering with local institutions, and whose investment strategies rely less on directionality and more on volume and volatility. Armed with such experience and capabilities, we believe China represents a compelling opportunity for systematic investment strategies. And we intend not only to maintain our presence in the country but to increase our activities there.
To continue reading, please click the image below to request access to the full paper.
