This month’s feature is on the Chinese equity market, which has been a material underperformer over both the short and long term. The relative strength in China’s economy has not translated into equivalent growth in earnings for shareholders. A key factor has been the lack of profit focus by state-owned firms, and state interference in the private sector. We dive deeper and conclude with some thoughts that guide our targeted allocation to this market.
In private markets we focus on the impact of higher interest rates on leveraged buyout (LBO) strategies. The sector boomed in a low-rate environment, but the world has changed. Higher interest rates are a clear negative for the sector. However, there have already been some significant adjustments. Valuations and debt levels in the sector have begun to decrease, back to levels last seen in 2016. Interesting entry points are becoming available for investors looking to deploy capital in this area, and those that have the ability to drive valuations through more than just financial engineering are the managers that should be sought out.
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