«We see all the signs of a massive speculative bubble in US technology stocks and are extremely worried about a potential crash in equity markets»
Mr. Mechelany, in the interview on 11.05.2020 (in German) you gave us a deep insight into your impressive career. How is the crisis in Dubai’s business world going - is your business also affected?
In the amazing world of the Covid-19 pandemic, Dubai and the United Arab Emirates have suffered considerably considering the heavy reliance of the economy on tourism, travel, hospitality and real estate. However, the health crisis was well managed by the Government with their proverbial efficiency and pragmatism and the economy is proving more resilient than many anticipated for now. In the financial sector, the government has the resources to handle any systemic risk and as far as our business of research and advisory, we have not been really affected. In fact, as always, in difficult times there are opportunities for expansion and we are currently exploring such opportunities.
Is your main customer base locally based or international?
Our customer base is both local and international, but our services are global by nature so the focus is not necessarily the local market for now, even if we see great opportunities locally for the long term.
What are currently the highlights of your research?
We were amongst the few analysts and commentators to warn about the looming correction in February 2020, and, like most analysts and commentators, we are currently amazed by the total disconnect between the exuberance of US investors and the bubble in the US technology sector and the reality of the underlying economies. To tell the truth, having lived through the Japanese bubble of the 1980’s, the Asian crisis of the 1990s, the dotcom bubble of 2000 and the Great Financial crisis of 2007, we see all the signs of a massive speculative bubble in US technology stocks and are extremely worried about a potential crash in equity markets. Many commentators are seeing the signs but very few are actually acting upon them. This reminds us clearly of the Japanese equity bubble of the 1980s and unfortunately, we also see the same background of overleverage of the corporate sector that led to the subsequent two decades of debt-deflation that plagued Japan in the 1990s and 2000s. We are clearly long-term negative on the US economy, the Dollar and US equities.
At the same time, we had rightly predicted and are currently witnessing the beginning of a secular asset allocation shift out of the US and into Chinese assets and the Chinese currency. China is pulling out of the Covid recession much faster, in a more cohesive manner and from a much more undervalued base than the rest of the world.
We have been advising our clients to increase substantially their allocation to China and the Yuan.
Where do you see the «big picture» in the coming months?
Fundamentals always come back to the fore at some point and the current disconnect between the valuation of equity markets and the lasting negative impact of Covid will eventually end. As highlighted above, the main feature of the current big picture is the speculative bubble that is prevailing in the US technology mega caps, testified by the irrational rise in these stocks in the second quarter and the behavior of stocks like Tesla that we started to short last week. With hindsight, investors will look back at this exceptional rebound in equities, fueled by a speculative frenzy of individual investors, and will wonder how they did not take this unique opportunity to bail out of these hyped stocks.
From an economic standpoint, the recovery from Covid will be long and arduous in countries like the US where record high unemployment and record high debt will keep a lid on consumption for years, as was the case in Japan of the 1990s. Corporate profits have stopped growing in 2012 and are now going to decline for an extended period of time, something that is not yet factored in by the community of analysts.
From the political standpoint, the damage caused to the world by the Donald Trump’s Presidency will be lasting and China has taken a new, and much more assertive course for its next development phase, as testified by the clampdown and profound reforming of the status of Hong Kong. But far from being a threat, we see these developments as positive in the long term as China will finally rise to economic - and eventually political dominance - in the next decade. Once again, strategically, investors should sell high - the US markets and currencies - and buy low - the Chinese assets and currencies.
This change of world leadership goes in fact much further than a simple game of economic dominance. It is a real questioning of the respective successes of the Western democracies’ models of governance and society and the Chinese, Singaporean, UAE or Vietnamese models of Governance where politics is left to professionals - as is the case in the Western private corporations models of governance - instead of asking uninformed citizens to choose little experienced leaders on the basis of money, demagogy and promises that can never be fulfilled by the term limitations of our democracies. The world is moving to a new world order, but it could well prove more efficient than the free-wheeling US capitalism that has bred all kind of excesses ranging from poverty, inequalities, criminality to unemployment, speculation, debt accumulation and derelict infrastructure.
How can one subscribe to your well-known research?
Our general research is available by subscription through our website mechelanyadvisors.com and we also provide specific advisory services to institutions through direct consultancy agreements.
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Founder and CEO of the company Mechelany Advisors FZE in Dubai, Jacques Mechelany, has over 36 years of investment management and business development experience in banking and finance in Europe, the USA, and Asia. He held senior executive positions in finance, running banks and investment management companies for prime financial groups including Bank of China, Banque Heritage, Union Bancaire Privée, Bank Julius Baer, Barclays Bank, Kleinwort Benson, and Banque Arabe et Internationale d'Investissments (BAII).