Animal Spirits Podcast Summary
Episode: Talk Your Book: Will China Win the Trade War?
Host: The Compound
Release Date: May 12, 2025
Introduction
In this insightful episode of the Animal Spirits Podcast, hosts Michael Batnick and Ben Carlson engage in a deep dive into the dynamics of the ongoing trade war between the United States and China. Joined by Brendan Ahern, Chief Investment Officer at CraneShares, the discussion centers around the performance of Chinese stocks, shifting market sentiments, and the broader implications for international investors.
Recalling Past Sentiments and Shifting Perspectives
Brendan Ahern begins by reflecting on the end of 2024, highlighting the previous pessimism among American investors towards international stocks, particularly Chinese equities.
Brendan Ahern [00:43]: "Last time Brendan joined us was the end of 2024... the average American investor had absolutely thrown the towel on international stocks."
Michael Batnick concurs, noting the unexpected resilience of Chinese stocks despite widespread negative sentiment.
Michael Batnick [01:08]: "No one predicted trade war and following dollar and all this other stuff... sentiment totally swing in the other direction."
Performance of Chinese Stocks During Trump’s First Term
The conversation shifts to the performance of Chinese stocks during President Trump's first administration. Contrary to expectations, Chinese equities, particularly those in technology, thrived despite trade tensions.
Brendan Ahern [02:31]: "From 2016 up through 2020 was one of the great time periods for performance for KWEB and Chinese equities... Despite all the trade war, tech war actually performed really well."
Shifting Market Sentiment: From Pessimism to Optimism
Initially, sentiment towards Chinese stocks was overwhelmingly negative, with low investor confidence. However, recent developments have led to a notable shift.
Brendan Ahern [03:17]: "The dollar is down. International stocks are doing well. The trade war has seemingly benefited international stocks way more than the U.S."
Michael adds that these changes may be temporary but significant enough to reconsider international investments.
Michael Batnick [03:50]: "Is this has enough change that you can see that actually this change is better for ex-US than things were before."
National Pride and Global Diversification
Brendan discusses the resurgence of national pride in various regions, which is influencing investment flows back into local markets.
Brendan Ahern [04:07]: "In Canada... in Australia... national pride is back... foreign ownership of US stocks... will come back to local markets."
He emphasizes the importance of diversification and the potential benefits for non-US equities as the Federal Reserve considers interest rate cuts.
Drivers of Chinese Internet Stocks: Beyond Earnings
Ahern addresses whether Chinese stocks are driven purely by earnings or if other factors play a significant role. He argues that sentiment, influenced by media narratives, often overshadows fundamental business performance.
Brendan Ahern [05:55]: "A lot of that has to do with media-driven headlines... investors in Asia are more positive... US media narrative is always so negative on China."
He highlights the disconnect between bond performance and stock performance in companies like Alibaba.
Brendan Ahern [07:55]: "Alibaba's US dollar bond has outperformed Alibaba's stock by like 60% over the last four years."
Real Estate and Economic Stability in China
The discussion delves into China's real estate sector, a critical component of its economy. Ahern explains that while tier-one cities are recovering, lower-tier cities are still struggling, affecting consumer confidence and domestic consumption.
Brendan Ahern [12:55]: "In the lower tier cities... it's still a very, very bad, you know, tough situation."
He notes recent government interventions aimed at supporting the real estate market, signaling a slow but steady recovery.
Changing Perceptions in the Tech Arms Race
The hosts explore the evolving landscape of the US-China technology race. Ahern suggests that Chinese tech companies have advanced significantly, moving beyond mere imitation to genuine innovation.
Brendan Ahern [14:40]: "They've moved way beyond that... flying drones, autonomous vehicles... a lot further along than we are."
He advocates for a cooperative approach rather than a zero-sum competition, citing potential collaborations in areas like battery manufacturing.
Impact of the Trade War on Chinese Tech Companies
Ahern discusses how the trade war, particularly semiconductor export controls imposed by the Biden administration, has both hindered and spurred advancements within Chinese tech firms.
Brendan Ahern [27:20]: "They've had to deal with the Biden export controls... forced local companies to step up their game."
He emphasizes that while short-term challenges persist, the long-term prospects for Chinese tech remain robust.
Behavioral Finance and Investment Strategies
The conversation shifts to investment behaviors surrounding ETFs like KWEB. Ahern highlights the influx of capital despite volatility, attributing it to investors seeking beta exposure rather than stock-picking.
Brendan Ahern [18:50]: "Some of that movement is money coming out of people saying, trying to pick the names is really hard. So I'm just going to buy the beta."
He underscores the importance of disciplined investment strategies, such as buying low and selling high through active rebalancing.
Consumer Behavior and Domestic Investment in China
Ahern explores the cultural and structural reasons behind the low domestic consumption and investment in China. Factors include limited social safety nets and strong cultural obligations towards family.
Brendan Ahern [20:41]: "Culturally you're not shipping grandma and grandpa off to the old folks home. You're responsible for your family... you save a lot because you have these obligations."
He also mentions governmental efforts to boost domestic consumption as a strategic response to reduce reliance on exports.
Future Outlook: Semiconductor Wars and Emerging Opportunities
In addressing the semiconductor chip war, Ahern posits that while export controls pose challenges, they also drive Chinese companies to innovate and diversify their supply chains.
Brendan Ahern [27:20]: "They've had to deal with the Biden export controls... these banned ships end up going through other countries... Deep Seek forces you to do the valuation comparison."
He remains optimistic about the opportunities within Chinese tech despite geopolitical tensions.
Conclusion: Strategic Positioning and Investment Opportunities
As the episode wraps up, Ahern emphasizes the importance of strategic positioning in Chinese markets. He advises investors to think critically and capitalize on the inherent opportunities despite volatility.
Brendan Ahern [28:15]: "There's a lot of really good opportunities there. If you'd spend the Time and think slow."
Michael and Ben thank Brendan for his valuable insights, encouraging listeners to visit CraneShares.com and chinalastnight.com for more information.
Final Thoughts
This episode of Animal Spirits Podcast offers a comprehensive analysis of the current state and future prospects of Chinese equities amidst the ongoing trade war. Through expert insights and nuanced discussions, listeners gain a deeper understanding of the complex interplay between market sentiments, geopolitical factors, and investment strategies in the context of US-China relations.
For more insights and updates, visit CraneShares.com and follow Brendan Ahern’s daily blog at chinalastnight.com.