China has long been considered the low-cost manufacturing capital of the world given its plentiful and relatively cheap labor. Since the 1980s, many Chinese corporates had been importing “know-how” and intellectual property to manufacture sophisticated end-products, rather than cultivating in-house expertise. However, with the continued increase in Chinese wages, the focus on margins is becoming more acute. An increasing number of companies we meet have been promoting in-house innovation in an attempt to transition to a more profitable and sustainable business model.

Investors today are facing a conundrum.  After a multi-year period of moderate equity volatility, in February, we saw volatility spike 116% in just one day.  While we don’t expect a persistently high volatility regime given the solid macro backdrop, we do believe volatility has returned and expect more episodic volatility reflecting political uncertainty and full valuations.

The political situation in Italy is fluid and Italian assets remain highly sensitive to political developments. That said, we are surprised that financial markets are not reassured by the failure to form a coalition government by parties that have called into question Italy’s membership of the European Union (EU) and the Euro area.

We describe our core view as pro-growth and pro-equity. We are equally pro-reality, with an environment of exceptionally low volatility masking a rising set of potential vulnerabilities.