The sectors you want to be invested in ahead of the next economic regime change

"I think it poses some risk in the short term when you have high expectations, whether you talk about multiples or earnings expectations at a time when liquidity in the economy is slowing down because that tends to put pressure on corporate earnings," Swan says. 

This thesis is the foundation for why Swan and his team have moved money out of India and into China, Hong Kong, and Taiwanese stocks. To find out where he is finding idiosyncratic (individual) opportunities right now, read the edited summary or watch the video.

edited transcript

LW: China and India are on markedly different trajectories. Can you break that down for us?

Swan: They are big economies that are at different stages of development. I think there's a cyclical element and there's a structure element. I think the long-term outlook for India as we see it today remains fairly healthy. I mean, we don't really see bubbles in the economy, but it has done well in the last few years. 

Corporate profit growth has been strong and that's occurring at a time when cyclically liquidity is slowing down a little bit. I think it poses some risk in the short term when you have high expectations, whether you talk about multiples or earnings expectations at a time when liquidity in the economy is slowing down because that tends to put pressure on corporate earnings. 

The flip side is China is at the end of an economic model, growth is slowing. We have a deflationary setting which is always bad for corporate profitability. 

Swan: I think from a stock-specific point of view, there are still some really good interesting companies in India. We do tend to find pretty high-quality companies up there. We do think the macro overall means a lower allocation today because of the risk to growth. But within that, there are some really interesting higher growth stories. 

Whether it's talking about healthcare companies, transport companies, consumer companies, or even financial services firms, there's always opportunity inside that market. 

LW: How do you avoid the landmines in the Chinese equity market?

Swan: The first step is that everything moves here. This is a very big liquidity injection that the government is promising for both monetary policy and fiscal policy. And I think it's important to recognise why it's happening. Chinese policymakers have prioritised currency stability above everything else this year. The way you do that is by keeping real interest rates high relative to the currency or the country that you're trying to stabilise your currency against, and that is the US. Now, the problem for China is the US has a very different economic setup. They've got higher growth and higher inflation, and therefore tight monetary policy. But to keep the currency stable in China, up until recently, they've had to run US monetary policy even though their economic situation is the opposite. 

Through the course of this year, the policymakers have been tightening policy when in fact many people have been arguing they should be loosening, but that's because they've prioritised currency stability.