August 2023

The main equity markets fell by almost 5% during the month before recovering. The EuroStoxx 600, the S&P 500 and the Nasdaq fell by -2.54%, -0.24% and -0.65% respectively in August.

So, after a very respectable performance since the start of the year, the equity markets ended up worrying about the situation in China, which had been deteriorating steadily since April. Weak consumer spending, and especially the property market, led to a mild wave of local panic, which crystallised when an investment vehicle, the ‘Zhongrong’ trust, declared itself unable to meet some of its commitments in mid-August. Chinese investors, having failed to anticipate this risk, began to re-evaluate these savings products, and requests for early redemption became increasingly pressing. The fall in property prices could therefore be reflected in a more general infection of the financial system, through these opaque investment vehicles known as ‘trusts’, a phenomenon with which we were familiar in 2008 in an approaching form.

It should be noted, however, that most of China’s financial system, particularly its banks, is publicly owned and that the economy is in fact semi-administered. A default with “systemic” consequences is therefore unlikely. Indeed, the bankruptcy of property developer Evergrande two years ago did not trigger a Lehman-style panic.

We therefore believe that China is facing major structural problems, in particular the inevitable loss of momentum of its growth model, which relies too heavily on property, investment in tangible assets and exports. The weakness of its domestic consumption is unique in the world. The increase in geopolitical tensions is also now a major factor in the flight of foreign capital. In short, a change of course is more than necessary to put growth on a sound footing even if the Chinese economy is by no means on the brink of collapse.

For Western investors, apart from a few highly exposed sectors such as luxury goods, the risk is actually macroeconomic. This internal slump could drag the rest of the world into recession. We are aware of this possibility. However, it would be mitigated by the low dependence of developed economies on the Chinese consumer. Other emerging countries, such as India, remain very dynamic and are taking over as drivers of global growth. We therefore believe that these concerns do not justify a radical change in our investment policy at this stage.

However, we remain very vigilant on this subject and will not hesitate to change our mind, or to make the necessary investment decisions if necessary.

Clartan funds declined in August: Valeurs and Europe fell by -1.60 % and -2.12 % respectively, Evolution by -0.29 %, and Ethos by -2.12%. Clartan Patrimoine was up 0.19 %.