Note: after nearly 4 years of blogging on an almost weekly basis, I will be taking a break for a month or two. The plan is to recharge, work on other personal priorities and perhaps even explore some new content/ideas for the blog upon my return to it. In the meanwhile, readers will likely be grateful for the downtime and therefore reduced frequency of Off-Piste emails arriving in their inboxes! Thanks again for all the continued support and look forward to reconnecting soon.

This week’s readings/links:

The Observer Effect: Interview with Marc Andreessen.

Excellent long-form interview with many useful insights on productivity, learning, improvement and motivation, process vs. outcomes, making bets etc. Well worth your time.

Anne Stevenson-Yang: China is stuck in a vicious cycle.

Skeptical about a rapid recovery of the Chinese economy. She spots serious problems in the labor market and in the real estate sector. Also warns of fraud at investor darlings Alibaba and Tencent.

Trust, patience and hard work: How Jürgen Klopp transformed Liverpool.

You don’t have to be a football fan to appreciate Liverpool’s recent success as a case study in how to transform a struggling organization burdened by the weight of its own history.

Richard Lawrence: ESG integration at Overlook. Some of my personal notes below (not a full transcript, paraphrased, so any mistakes are my own).

Each of the 3 ESG categories has unique characteristics/challenges. They started out on the governance front first, social perhaps 10 years later and environmental 10 years after that.

On governance, some of their early campaigns and efforts with companies in Asia weren’t really successful. Developed the concept of modern finance technology, which is the provision of conflict-free and private advice to the chairman and CEOs of public companies on issues of corporate governance and capital management, with the objective of making better public companies.

The key is they don’t go looking for trouble, instead looking to develop a real, open and transparent relationship. First year, there may be some blockages, or gaps in the CEO/chairman’s knowledge or expertise on governance issues. Not trying to catch them out in meetings. Got to do it privately and confidentially. The more people in the room, the lower the chances of success. Slowly starts to resonate with certain executives. They lean in, begin listening to you. Only looking to move from 12 to 1 o’clock, if they buy in, they will pick it up and take it the rest of the way.

Social – began after 97/98, had spent a lot of time in factories in Southern China. Conceptualised the universe of public companies as a pyramid. Top is world class, bottom is the guys who stumble along, often in capital and working capital intensive, low margin businesses. Began to push Overlook higher up on the pyramid. In some sense, an exclusion of the bad, but have to remember that Rome was not built in a day, companies can change.

Environmental – started as a personal journey, realized how environmental issues are interconnected in our lives in so many ways. Then about getting his employees and the company to carbon neutral. About 8-9 years ago, started process of excluding certain companies from their universe (e.g. coal mining and transportation, fossil fuel refineries). Over time, however, have recognized they need to be more nuanced and open with regards to this exclusion policy, as companies can change (e.g. Ørsted). If your thesis is that companies that are part of the solution are going to be one of the main drivers of your performance, you start to expand your research to look at what companies are going to leverage climate change to their benefit.

Subtle complexities when it comes to integrating into their process – in their universe, 44% of the companies don’t release carbon emissions, have to estimate by using international comparables. Can’t reduce emissions until you know where they are coming from. Also have to be aware of how carbon accounting can be manipulated. Next, many companies recognize climate change exists but are still overly reliant on the government to solve the problem. Need clear involvement by the board of directors and CEO, looking for allocation of capex consistent with Paris agreement. By misallocating capex, you are building in a problem for the next 15-20 years.

Even though his team is very educated on these issues, it is still difficult for an analyst to fit this into a ~1 hour meeting with a company. They are trying to figure out the competitive forces on the business, pricing power etc. 

Other concerns – US attitudes towards relationship with China. Going to be so counterproductive if we get into a cold war, just doesn’t see anyone presenting the other side of the case. Problems have developed and built up over time, but many can be solved with private and confidential discussions. The other concern he has is that politics seems to be trumping economics today. Bailing out the weakest of the weak, building up debts etc.; will have consequences down the road.

Cheah Cheng Hye: Interview at the Bloomberg Invest Global conference (embedded below).

Major uncertainty facing investors today is the relationship between China and the US; need to look past this crisis, they will have to become partners and allies. US and China are ~42% of global GDP, China is moving to become the larger consumer market globally, ~31% of the annual growth in consumer spending comes from China. Decoupling makes it practically impossible to find solutions to the world’s issues, their relationship is just too important. In his view, China is not seeking to export their ideology, they are quite happy to let the US exercise global leadership. After the US elections in November, we can build on the phase 1 trade deal, thinks it is very much intact. Expects the future relationship will move more towards cooperation out of sheer necessity.

US businesses in mainland China would like to stay on, not thinking of leaving. Lot of focus on the headline US trade deficit number, but if you include the goods and services made in China by US companies, these don’t show up in US export numbers. If you account for this, the deficit suffered by the US is not very large, only a fraction of the officially announced number. The two countries are mutually dependent on each other. China is the leading source of credit, students, tourists, attractively priced consumer products, and also the fastest growing foreign market for US goods and services.

In his view, the US and China models are converging in many ways because the US (especially amid COVID-19) is moving towards what he considers a form of state capitalism where the Federal Reserve, federal government and the state government area increasingly intervening in the economy to prevent unemployment, create what amounts to a national industrial policy. This is what they have accused China of doing in the past. At the same time, China is moving further towards deregulation and providing more space for free markets.

On HK, his view is that the real issue isn’t politics, but socioeconomic. Very large degree of inequality created by a system of monopoly capitalism. Only a small number of people are getting richer, while the middle class haven’t seen any increase in their living standards or purchasing power for 20-30 years. Housing totally unaffordable for young people. The system denies access to opportunities for younger people. The focus should be on these issues.

Regarding the national security legislation, the HK market seems to be looking past this – the legislation has advantages and disadvantages, but it basically allows Hong Kong to leave behind a very contentious issue, which is HK’s obligation under one country two systems to implement some sort of a national security law. HK had 23 years do it, it was part of the deal signed between Britain and Beijing on Hong Kong’s future, but it never managed to happen, so now Beijing is imposing a version of it on HK. 

Opportunity for foreign and HK asset management companies on the mainland – on 1st April 2020, China formally opened its doors in financial services to foreign brokers, banks and asset management companies (went unnoticed by the media). Biggest opportunity in a generation for the global asset management industry and they are looking to take full advantage of this. Huge pool of savings waiting to be managed, growing at double digit figures per year. They have been in China for a while already, set up their office in Shanghai in 2011, now cited by independent consultants as one of the top 10 foreign asset management companies active in the mainland Chinese market.

Outlook for markets – they are being very cautious. US markets are in very high-risk territory, you don’t need to be a genius to figure that out. There is a mismatch between high asset valuation and poor underlying economic reality. He thinks the huge fiscal and monetary stimulus to keep the party going will eventually result in tears. The US system increasingly emphasizes financial engineering, with the financial system taking over the real economy. They need to undergo a period of saving, austerity and and rebuild their basic infrastructure. But it is difficult to do that politically. Doesn’t appear to be very conducive to a soft landing in the years to come. 

This is not true of the Chinese markets though. Say what you like, there was a first-in first-out effect, thanks to the very effective control measures for the pandemic. They have been able to achieve a v-shape recovery without resorting to extreme fiscal and monetary measures (at least relative to global standards). Looks like quite a convincing recovery at a time where the market is trading at ~13 times earnings, so the value investor should be looking seriously at China related stocks and bonds, while being cautious on US related stocks. This is not some kind of a political statement, just fact.

Bridgewater Associates: Managing money in a zero interest rate environment (embedded below).