‘China is very much on our radar,’ US economy shows unexpected resilience – Mark Perchtold (OMBA)

Mark Perchtold, the founding director of OMBA, a company specialising in using Exchange Traded Funds (ETFs), maintains a positive outlook on China despite geopolitical challenges. In an interview with BizNews, Perchtold attributes his outlook on China to various stimulatory measures,  including significant reforms by the Chinese governments to boost China’s property market. He believes that geopolitical risks are mitigated by China’s extensive bilateral agreements with other regions. Perchtold also emphasised the importance of closely monitoring inflation and the Federal Reserve’s response, as easier monetary policies and lower interest rates are crucial for boosting the US economy. He noted that the US economy has shown surprising resilience, with robust employment data despite rising interest rates. Regarding AI investments, Perchtold advises maintaining some exposure but warns against overcommitting.

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Edited transcript of the Interview

00:00:11:15 – 00:00:27:19 Linda van Tilburg
I’m Linda van Tiburg from BizNews. And with me is Mark Perchtold. He’s the founding director of OMBA Advisory and Investments, a company that has a unique approach to investing. They focus on exchange-traded funds, or ETFs. Hi Mark. Welcome again to BizNews.

00:00:27:20 – 00:00:29:04 Mark Perchtold
Thanks. Thanks for having me.

00:00:29:06 – 00:00:32:06 Linda van Tilburg
So why this focus on ETFs?

00:00:32:08 – 00:00:52:01 Mark Perchtold
Oh, we’ve had this conversation before. But there’s obviously been a tremendous boom over the last many years, if not decades, in the use of exchange-traded funds to build portfolios. For us, they’re just a fantastic tool. We think of them as a tool to build a portfolio. There are lots of different types of ETFs.

00:00:52:01 – 00:01:18:00 Mark Perchtold
There are traditional ones that track major indices. You know, you get active ETFs, you get other ones which have some sort of clever way of reweighting an index, and smart beta or factor ETFs. You’ve got thematic ETFs which have boomed, but the way we think about using them is in an active way. So although they are passive instruments that track an index, we are active managers that use ETFs as a tool to build portfolios of differing risk profiles with different strategies.

00:01:18:00 – 00:01:36:00 Mark Perchtold
And so, for example, in fixed income, we might express a view on keeping our interest rate risk or duration short, long, or neutral. We might want to take more credit risk and own high yield or emerging market debt, for example. And you can do all that with ETFs. You might want to have a different currency exposure for your fixed income.

00:01:36:02 – 00:01:58:06 Mark Perchtold
In equities, we might use ETFs in different sectors. For example, we might have a sector view of a sector overweight to underweight, or a country overweight to underweight, or a particular theme. There are lots of interesting themes in the world today, whether it’s cybersecurity, robotics, AI, cloud computing, e-commerce, clean energy, and the decarbonization and transition to a cleaner world.

00:01:58:08 – 00:02:18:12 Mark Perchtold
There are so many products available at your disposal. Even more recently, you’ve now got active ETFs, which are similar to a traditional active mutual fund. But instead of having daily dealing, they trade on an exchange and are actively managed in their follow strategy. They are exchange-traded funds as opposed to funds that trade with the daily NAV.

00:02:18:12 – 00:02:41:00 Mark Perchtold
So the boom in ETFs, with over 8000 ETFs in the world, presents an opportunity for us to use those as a tool to build portfolios. Inherently, our portfolios will always be more diversified because we’re not taking big concentrated single bond or single stock risks. We think that affords investors some level of comfort in avoiding single stock or single bond blowups in a portfolio.

00:02:41:00 – 00:02:46:06 Mark Perchtold
Of course, your market risk exists, but your single stock or single bond risk has been removed.

00:02:46:08 – 00:02:52:21 Linda van Tilburg
Well, let’s talk about market risks. The world economy is still in a squeeze. So what should investors be looking out for?

00:02:53:01 – 00:03:15:17 Mark Perchtold
Well, for us, and not just us, I guess most investors around the world follow interest rate cycles and inflation as one of the key drivers of what will impact the outlook for markets. The US has been surprisingly robust. If you go back 6 or 12 months, everyone was talking about this imminent recession from the US because interest rates moved up over 5% in quite a short period of time.

00:03:15:17 – 00:03:34:23 Mark Perchtold
Having had a zero rate environment for a long time post the financial crisis. So that big move up in interest rates was expected to squeeze the economy more. But it hasn’t. Employment data remains pretty robust. In the US, the economy’s been growing in the G10 world at the fastest rate of 3%.

00:03:35:00 – 00:04:13:23 Mark Perchtold
So the US has actually so far engineered a soft landing. Inflation is one of the concerns because inflation hasn’t come in to the degree that everyone would have expected, but one hour based on where interest rates are. A lot of that’s been driven by what’s happening in the shelter component of inflation. One of those components is owner’s equivalent rent. Owner’s equivalent rent makes up a big portion of core CPI. That’s due to various dynamics taking place in the U.S. housing market, one of which is a decrease in supply versus the number of people entering the country.

00:04:13:23 – 00:04:35:21 Mark Perchtold
So I think the U.S. population has grown by about 30 million people since 2008, and they haven’t built enough homes per annum, I think sort of six to seven hundred thousand per year. So you’ve got a supply issue, but then you’ve also got the interest rates effect that, you know, a lot of the mortgages in the US are fixed long-term mortgages, which is sort of new compared to how it was pre-global financial crisis.

00:04:35:21 – 00:04:56:05 Mark Perchtold
They learned the lesson. All these floating rate mortgages caused the subprime issue and the big blowup in the housing market. Now, post that period, most buyers of property will have a 20 or 30-year fixed mortgage. Those rates have risen to over 7%. So people who want to potentially move home would have to lock in a much higher rate than what they currently pay.

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00:04:56:05 – 00:05:15:18 Mark Perchtold
I think average rates now across mortgages in the market are about 3.8% to just sub-four. So that’s meant that people haven’t been selling homes, so there aren’t many homes available in the second home market, let’s say, where people who have an existing home are selling and they’re downsizing.

00:05:15:18 – 00:05:34:19 Mark Perchtold
A lot of the baby boomers that traditionally, as the kids would have grown up, might downsize and sell their big house, are not doing so because they’re going to have to have a higher mortgage cost. So this dynamic in the housing market has meant that the component of owner’s equivalent rent, which is only done as a survey every six months, has caused inflation to remain sticky.

00:05:34:19 – 00:05:54:08 Mark Perchtold
I think two-thirds of the inflation number that we saw, so a 3.8% last month, was driven by this rental component. So although you’ve seen inflation come in and that’s good news, it hasn’t come in to the degree the Fed would have wanted. The broader thinking in the world is that the Fed are likely to stay on hold with higher rates for longer.

00:05:54:14 – 00:06:15:12 Mark Perchtold
Whereas if you rewind to the beginning of the year or late last year, everyone was expecting a number of cuts already by now and certainly by the end of the year. So for us, watching this inflation number and the Fed reaction is very, very important because easier monetary policy and lower rates boost an economy for the simple reason that people aren’t servicing as much debt.

00:06:15:14 – 00:06:27:10 Mark Perchtold
So that’s one of the key things for us in terms of what we’re watching very closely, because trying to understand that inflation dynamic and impact the Fed’s actions is probably driver number one. But there are lots of things to watch all over the world.

00:06:27:14 – 00:06:37:15 Linda van Tilburg
So what are the other countries you’re watching? I looked at the UK and observed inflation is also a bit sticky, that it hasn’t come down as much as they thought. And can we also talk about China?

00:06:37:17 – 00:07:00:02 Mark Perchtold
Sure. So, you know, very, very different economies. The UK has a little bit of a higher level of inflation. It’s certainly higher than expected. But the Bank of England is still expected to cut rates probably in June. They’ve indicated as such, similar with the ECB in Europe likely to cut rates outside of the US.

00:07:00:02 – 00:07:17:07 Mark Perchtold
If you look at G10, many of the major central banks are likely to do their first cut in the middle of the year because inflation has been coming in. One of the drivers of potential decline in prices was the spike in inflation due to energy prices rising post the invasion of Ukraine by the Russians.

00:07:17:09 – 00:07:39:20 Mark Perchtold
That caused a bit of a wobble. Supply-demand balances have fixed themselves now. But China is actually exporting, in a way, deflation because they’ve got no inflation at all. So that’s good for the rest of the world that buys Chinese goods because they’re not having to pay more for them. All the issues we had from supply chain problems in China, lockdowns, and not being able to, for example, finish.

00:07:39:20 – 00:07:56:15 Mark Perchtold
You call it because some component was missing and you couldn’t get it from China, which meant that secondhand car prices shot through the roof because you couldn’t get a new car because it wasn’t finished. Those have abated. China’s opened up. In fact, exports have boomed, and the manufacturing sector is looking very strong. So China is definitely, you know, we’ve always at OMBA liked having a greater APAC exposure.

00:07:56:15 – 00:08:37:12 Mark Perchtold
Because of economic activity taking place not just in China but throughout the APAC region. China’s one of the regions where we’re slightly overweight, and we’re comfortable maintaining that. You’ve obviously had a very meaningful slowdown during the lockdown period in China, but you’re starting to see economic activity pick up. The number of travelers traveling within China itself, traveling outside of China, the stock market activity that we’ve seen in recent months from Hong Kong investors investing into China has increased. The government has just come out with a whole host of reforms to boost the property market, which has slumped quite meaningfully. Everyone’s talked about the Chinese property bubble. It’s already started to deflate. It hasn’t been a GFC-style subprime disaster like we saw in the US. The government has intervened very cleverly to let the bubble burst slowly, but prices have fallen meaningfully.

00:08:57:11 – 00:09:22:07 Mark Perchtold
That’s obviously hurt a lot of Chinese savers who traditionally save with second properties, etc. They’ve now come out with a whole host of reforms to boost the property market, including getting local government to buy some of these properties for housing for the population. Also, reducing the deposit amount required on a down payment for a property by 5% for the first-time or second-time buyer.

00:09:22:12 – 00:09:45:20 Mark Perchtold
So I think it’s 15 and 25% deposit required, which is a drop from what it was before. They’ve dropped the lending standards in terms of allowing a low interest rate to be given on a mortgage. So there are all these stimulatory things happening in China, and a lot of foreign investors sort of capitulated in the last 12 to 18 months and said, we’re out of China.

00:09:45:20 – 00:10:09:16 Mark Perchtold
It’s not investable. We’ve pulled out and I think we’re likely to see a comeback of many of those investors over the coming 6 to 18 months because valuations are so attractive. China is growing at over 5% per annum. They’re leading in all sorts of areas, whether that’s battery technology or electric vehicles manufacturing. The property market is stabilizing.

00:10:09:18 – 00:10:23:14 Mark Perchtold
So I think as we look at the world in terms of big regions where you could allocate capital, China is very much on our radar. We maintain a slight overweight. But it’s got its issues. I won’t go through all of them. But we’re net positive in China.

00:10:23:16 – 00:10:33:10
Linda van Tilburg
So how will this growth in the Chinese market continue, especially in view of the pressure that the US is starting to put on China?

00:10:33:13 – 00:10:50:10
Mark Perchtold
In terms of geopolitics, I mean, obviously, the tariffs that we’ve seen coming out of the US now, the Biden administration, you know, a lot of that, you could argue, is somewhat political. You know, Trump slapped on tariffs in his term, and now Biden’s up against Trump. And so, he’s put on a lot of tariffs. You know, a lot of that’s to boost domestic production in the US. A lot of it’s also political, you know, to some degree, to get voters on side. It is an issue. If the whole world stops buying from China, which isn’t going to happen, or it becomes too expensive, there could be a bit of a knock.

00:11:07:13 – 00:11:36:10
Mark Perchtold
But China has also signed a number of bilateral trade agreements with other countries outside of the EU and the US. I forget the exact numbers, but in terms of the trade agreements with Latin American countries, for example, some of the APAC countries, and some of the African countries, their bilateral trade agreements mean that China doesn’t only have to export their products to the US and Europe, which are the two major buying regions. The rest of the world is also growing, and China’s a meaningful player in that regard.

00:11:36:12 – 00:12:03:06
Mark Perchtold
You know, for us, it’s a combination of looking at valuations and saying these stock prices are attractive based on earnings growth. And then, you know, one of the big changes is whether Chinese companies will start to declare more dividends so that you, as a shareholder, actually get your money back. Historically, the dividends have been reinvested in the growth of these businesses, and you’ve started to see a number of the companies, particularly some of the big internet and tech companies, do share buybacks and pay dividends.

00:12:03:07 – 00:12:23:09
Mark Perchtold
And we think that trend will continue. Chinese savers are very different from many savers in the West. In terms of thinking about their pensions and retirement in the West, a lot of people would invest in the stock markets, and you’ve often got tax breaks in many countries around the world, as you know, in South Africa, the UK, Europe, and the US for saving into a pension or various savings vehicles.

00:12:23:09 – 00:12:43:20
Mark Perchtold
You don’t have that to the same degree in China. And so, if there was ever reform to boost savings into the stock market, there’s huge scope for an increase in prices. But valuations are attractive. Geopolitics for us is always going to be there. China has become a dominant player in the world, the second-largest economy.

00:12:43:22 – 00:13:09:11
Mark Perchtold
You know the rhetoric around China will not change from the West. We tend to read only Western press in English, let’s say, well, maybe in South Africa, other languages, but the bulk of us read this press that’s biased towards the Western view of China. If you read press from Southeast Asia or from, you know, maybe from Hong Kong, just less Western-centric press relating to things happening in China.

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00:13:09:13 – 00:13:32:22
Mark Perchtold
You don’t necessarily glean this pessimistic view, but the geopolitics will never go away. And it’s interesting. Just on that topic, I was having a meeting recently with someone, and the topic of Taiwan and China came up. You know, obviously the sensitivity of a potential invasion of Taiwan by China, which is certainly not our view at all, we think it’s highly unlikely, is not never going to happen.

00:13:33:00 – 00:13:53:14
Mark Perchtold
That’s pretty much moved out of the front and center of the press because we’ve got other geopolitical hotspots. You know, you’ve got what’s happening in the Middle East at the moment. You’ve had the Russia-Ukraine invasion. So the rhetoric around the geopolitics of China with respect to the West is just a function of what people want to hear at a moment in time because there maybe isn’t anything else to write about.

00:13:53:16 – 00:14:20:21
Mark Perchtold
And geopolitics never goes away. If you are an investor and you want to allocate capital and you’re always worrying about the next geopolitical hotspot, you’ll never allocate money because there’s always something. So our view is let’s just go to the fundamentals of investing. Look at valuations, look at economic activity. Look at monetary policy, fiscal policy, and then form a view. Geopolitical commentary will always be in or out of favor at any given moment.

00:14:21:07 – 00:14:27:05
Linda van Tilburg
Well, anything else an investor should be looking at? Because you mentioned earlier, I mentioned cybersecurity.

00:14:27:10 – 00:14:46:03
Mark Perchtold
Yeah. I mean, obviously, AI has been a very important topic with the likes of Nvidia, who I think are reporting today. So that’s, you know, that’s one of the bellwether names to watch in the AI space. And, you know, we’ve invested directly using ETFs into the whole sort of semiconductor space. And we follow AI.

00:14:46:03 – 00:15:12:08
Mark Perchtold
And in one of our particular funds, we have exposure to AI. So it’s very much front and center. I think valuations, you know, imply that the market is expecting exceptional returns from AI-related businesses to continue for a long time, and one should perhaps have a little bit of caution because although the growth might be stellar, it might not be as good as expected.

00:15:12:10 – 00:15:32:16
Mark Perchtold
And so you could still see disappointment in terms of stock price performance. So, you know, one has to balance off the secular trend of AI and the move towards AI in general over the next decade or two and the future of how humans do business and all sorts of things on the planet versus what’s priced in today.

00:15:32:18 – 00:15:59:05
Mark Perchtold
Because I think a lot of the success of companies like Nvidia has been front-end loaded to a degree, by big tech companies that have bought and wanted to be leaders in a particular area of AI and therefore bought Nvidia’s GPUs. So it’s a very fine balancing act on what’s the right valuation and potential growth. So, you know, you definitely want to have some exposure, but I wouldn’t bet the house on it.

00:15:59:07 – 00:16:18:03
Mark Perchtold
In summary, in terms of other themes, you know, obviously cybersecurity, we think, is a long-term secular theme that’s very important. You know, in today’s day and age where you’ve got a digital world, and more and more people are going online, you’re going to need more cyber protection. You know, the fraudsters are getting cleverer and cleverer.

00:16:18:05 – 00:16:37:09
Mark Perchtold
And so you need cybersecurity. It’s not going away. You know, in terms of clean energy, although there was a lot of perhaps overvaluation and froth in sort of solar and wind companies, there’s no doubt that the world will continue to move towards a greener world, you know, with all the various 2040, 2050 targets.

00:16:37:11 – 00:16:56:02
Mark Perchtold
So it’s a secular theme. You need to have some exposure. And there are different ways to get that exposure. You know, are you looking at solar, you’re looking at wind, you’re looking at the battery value chain, for example, or you’re looking at electric vehicles? There are lots of different ways in which you can get that exposure in a portfolio.

00:16:56:04 – 00:16:57:23
Mark Perchtold
So those are all themes we watch quite closely.

00:16:58:01 – 00:17:01:04
Linda van Tilburg
Mark Perchtold from OMBA, thanks so much for speaking to us.

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