Lead-Lag Live

Tariffs, Tech, and China's AI Awakening with Derek Yan

• Michael A. Gayed, CFA

Share episode

Trump's unexpected tariff announcements have sent global markets into a tailspin, yet beneath the chaos lies a fascinating story: Chinese tech stocks have actually outperformed their US counterparts over the past year. Why? The valuation gap is stunning—Chinese tech companies trade at just 14-15x earnings while US tech giants command 25-30x multiples.

The emergence of DeepSeek marked a watershed moment for China's technology sector. This breakthrough AI model demonstrated that China isn't merely participating in the artificial intelligence revolution but potentially positioned to lead it. For investors who've written off China as "uninvestable," this revelation demands a serious reconsideration of global portfolio allocation.

What many investors miss is how Chinese tech companies differ fundamentally from their manufacturing counterparts. These digital businesses primarily serve domestic consumers through online shopping, mobile payments, and gaming—activities largely insulated from direct tariff impacts. This domestic focus provides a buffer against trade tensions while still offering exposure to one of the world's largest consumer markets.

The AI revolution extends far beyond consumer applications like chatbots. The real transformation is happening at the enterprise level, where AI integration into existing systems is creating tremendous efficiency gains across sectors. From logistics optimization to healthcare advancements, AI is reshaping business operations globally. Most impressive is AI's coding capability, which has reached approximately 80% of human performance levels.

For those looking to capitalize on these trends, a diversified approach offers advantages over concentrated bets on the "Magnificent Seven." Consider exploring solutions like KraneShares' AGIX ETF, which provides exposure to 40+ companies across the AI ecosystem, including unique access to private AI unicorns typically reserved for institutional investors. In times of market volatility, this comprehensive strategy may help navigate uncertain waters while maintaining exposure to tomorrow's technology leaders.

Ready to rethink your global tech allocation? Explore how adding exposure to Chinese innovation might enhance your portfolio's long-term growth potential and resilience during market turbulence.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of KraneShares and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


Foodies unite…with HowUdish!

It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!

Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!

HowUdish makes it simple to connect through food anywhere in the world.

So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show

Speaker 1:

Let's talk about sort of how tariffs impact China in general.

Speaker 2:

Well, I think tariff like what happened yesterday is really like worse than many analysts' expectation right. So because if you look at the formula right, that tariff on US is really calculated by the trade surplus of each country right Vietnam and India to US and then like that 50% of that is really very high compared to the actual tariff from the other country. We think that's kind of like a starting point. Then, like definitely there's a lot of uncertainty for the following week but like it's actually like a very good strategy, like to really give like a extreme push pressure to other counterparty and let them negotiate and come back to you like looking for better deals, but it is a short term volatility.

Speaker 1:

I am very much looking forward to this conversation. I recently brought on CraneShares as a client of LeadLag Media. This is a sponsored conversation by CraneShares and, given all the news around tariffs and the insanity around volatility and AI, we're going to have a lot of interesting, thought-provoking conversation here. Please, folks, do me a favor like repost, get as many people to watch this as possible, because I think there's going to be a lot of really good perspectives here around Trump, around investing and just in general, what to do in this kind of environment. So, with all that said, my name is Michael Guyad, publisher of the Lead Lag Report. This conversation is sponsored by CraneShares. Joining me is Derek Yan. Derek, first time, you and I are doing this as a podcast, but introduce yourself. Who are you? What's your background? What have you done throughout your career? What are you doing currently?

Speaker 2:

Thank you for having me, michael. I mean, I'm senior investment strategist at CraneShares. My name is Derek Yan. I've been working for Crenshaw's over 10 years. Before that, I was working in China in the financial industry for a while, Myself being a strategist in Crenshaw's covering our technology space and many of our China and global equities. Yeah, so that's my background Like happy to chat about like anything investing in AI and technology and hopefully, like we can have a conversation around like how we really navigate this market.

Speaker 1:

Yeah, that's a lot to talk about there. Let's talk about just the experience level.

Speaker 2:

So some of the things that you had done prior to really regulate the hedge fund and private equity industry in China, that was not like a thing in China before, but now China introduced this idea like, oh, we should develop our own hedge fund and private equity industry so we create like a framework to really register all the funds and make sure like information and property disclosure.

Speaker 2:

But that's like interesting environment. I did a lot of research, consulting for the firm, for those companies as well, but then I was working with a lot of international hedge funds and like investment firms where I got an opportunity really to work with them in a lot of international projects. Then I moved to the United States. I got my financial degree here and joined Craneshares because Craneshares is kind of like both technology and China focused investment firm about like 10 years ago, like now we're fast forward. Like 10 years we've been developing our strategies across the world in the U? S and national China and a lot of like alternatives, like carbon markets, like liquid alternatives. So it's like a lot of strategies like on their own. Cranesha is on Brada now.

Speaker 1:

As you know, china has been a hard place to make money in, especially if you're a US investor, really for you can argue since the great financial crisis in 08. And that's not just a China phenomenon, that's a international, in general phenomenon. I'm curious to hear your thoughts on how DeepSeek, in particular, seems to have changed the mood. It seems like china was a bit of a sleeping giant in all this talk around ai, and then suddenly deep seek comes out, aside from the reaction that nvidia had that one day in particular. Um, ever since then, it just seems like some of the investors have realized hey, you know, china is not only very much involved in the space, uh, but could be a runaway winner.

Speaker 2:

Well, I think that's kind of like exactly what happened People are talking about AI previously is only US, because this round of the AI development is really driven by the chat GPT moment, where people realized the gen AI is kind of like something way beyond people's imagination, like their capabilities, the things they can do and the speed of the involvement. So that was kind of like back in 2022. I would think in 2023 is like great year for AI become mainstream in the US. However, we have been talking about similar things because in China, people doing AI research a long time ago, many top AI researchers and like scientists really are cutting edge of the research in terms of large-density models, but there's no such application like ChatGPT coming from China, application like ChagBT coming from China.

Speaker 2:

But I think like, just as those research and become to real business and applications, the deep seek is kind of like a moment people realize China has a similar capability of doing that kind of like technology. Then it's kind of like a kind of re-rating for the Chinese equity in the technology space, especially the internet stocks. So I've seen that since the beginning of the year that China technology really outperformed the US, starting from a year today. So that has kind of like a really kind of like a converge. Think about valuation, where US definitely is still very strong in earning growth but its valuation is much higher than China at 25 plus 27, plus even, I think, 30 earlier this year. But China is at 14 to 15 for PE, given their technology companies at a discount compared to the global peers. So that's kind of like a deep seek, is kind of like a wake up moment for those companies who are really trading at a discount for many years. But now the forward looking earning growth potential for those companies really changed because of deep seek.

Speaker 1:

Here's the reason I'm going to pull it up on my screen here. I'm looking at K, kweb right, your China tech ETF and it's actually pretty remarkable. I didn't realize this, but let me just share this here. If you look at a simple price ratio of KWeb against QQQ, which everyone always loves to talk about, nasdaq 100, you've actually, over the last year, outperformed US tech China tech stocks right On average. If you look at the K-Web as a proxy, why is it you think that people are not really talking about that that much? Is it just home bias? Everyone just is so used to talk about the Qs and not thinking about China as part of their overall portfolio construction.

Speaker 2:

I think, just like this, like US exceptionalism, has been like here for I mean two years now. So people are not looking anywhere, right? If you talk about looking at any country besides US, people call you up. That's stupid why I'm doing that. If you talk to any, even professional, institutional investors, like people are like, oh, we should exclude anything besides US. So that is something I would think now is starting to change because there's a growth elsewhere. Well, definitely there's a growth in the US. But we have, with DeepSeek and a lot of other AI applications, ai agents happening in China, all those kind of like development out of China. You kind of see technology growth is kind of like beyond US. So I think that's kind of like where people are starting to realize like there's opportunities in China in terms of technology investment.

Speaker 1:

And the question of course becomes are there more or less opportunities in China now that we have this seemingly hard change in the global environment because of tariffs? That obviously is the I mean the interesting thing about today's action, as we're talking about on, you know, liberation Day, tariff Day is international markets of China in particular really actually hasn't performed that poorly relative to US markets, which we're talking here after the close down more than 4.7% for the S&P. China hasn't really responded as negatively. So let's talk about sort of how tariffs impact China in general and then in particular, the China tech trade.

Speaker 2:

Well, I think tariff like what happened yesterday is really like worse than many analysts' expectation, right. So people thought like, oh, it's going to be kind of like maybe just 10%, but it's actually a number that people are getting really shocked and confused Because if you look at the formula, right, that tariff on US is really calculated by the trade surplus of each country Vietnam and India to US, and then that 50% of that is really very high compared to the actual tariff from the other country. So we think that's kind of like a starting point. Then, like, definitely there's a lot of uncertainty for the following week, but like it's actually like a very good strategy, like to really give like a extreme push pressure to other counterparty and let them negotiate and come back to you like looking for better deals. But it is a short-term volatility. I think like going gonna continue in the market for a while.

Speaker 2:

Uh, the real damage is still a little bit like uncertain. I think like, just like many like trade related or macro underrated uncertainty is like happening in 2018. You're talking about like first batch of tariffs, you're talking about export control on chips, and so you still have like a lot of market volatility. What can happen to that is, they're going to hurt valuation, right, they're going to hurt multiples. Unfortunately, just like the US market, as you said, like the Q's and S&P 500, they have a much higher valuation because the strong growth. So there's like a better aspect, like higher expectation on the market, so that what the higher valuation become like a victim right, because now with the uncertainty, the violations come down a little bit.

Speaker 2:

Um, but china, on the other side, have a much lower valuation, is already very cheap or lower valuation, so the safety margin is higher.

Speaker 2:

Like you cannot go much higher from this level given the current cheap valuation. So that's why, like you see, there's a kind of like the impact for China technology space is less compared to the global technology. Another point I want to mention is, like technology generally is a growth investment. But also look at the nature of the tariff is impacting trade, right, like it's impacting trade, impacting more like retailers, like manufacturers, but most technology companies in China, especially, is really focused on domestic consumption, right, it's like domestic revenue, people doing online shopping, people doing like mobile payment, mobile gaming, so those activities not much impact on tariff. So I would think that, to that point, people think fundamental may be less impactful for especially China internet names. So just I think, like just overall long term technologies, the fundamentals for both US and China technologies still very solid, but like just the headlines or the uncertainties, macro risk is going to really bring down the valuations for both US and China, down the valuations for both US and China.

Speaker 1:

So with the domestic consumption point for a bit, because I think there is a silver lining to all this tariff talk, which is it does bring into light the point that all these other countries can't just assume the US will be their consumer forever, or at least at the magnitude that has been the case for a number of years. One of the areas I've heard about why China has performed a lot better right relative to the US in this facility is because of the belief that there's going to be some stimulus bazooka right to try to really get the domestic side to ramp up as tariffs start to, you know, chip away at some of the revenue potential of China's exporters. What are your thoughts on that? I mean, should we, should we start thinking about it and looking for some real targeted fiscal spend?

Speaker 2:

I would think like first, I think people should have noticed the background of economic cycle is very different between US and China. So, starting from COVID, right, like there's a lot of stimulus, like trillions of stimulus packages from the US government to really expand the fiscal, like spend a lot of money from the government side and you have a low interest rate, like the monetary policy stimulus from the US side. So that stimulus cycle happening in the US during the COVID, boosting the equity market and all the assets in the US. However, in China, starting from, I think, 2014 or before that, what China has done is really deleveraged. They have been really pulling the credit from the real estate market and creating this deleverage on this like called systematic risk. So you have kind of like a man-made, kind of like people that just like bust a bubble on the real estate, like, oh, the real estate price was down like 20%, like 30%. That happened during COVID is the worst time, right, you have a COVID impact. You have the real estate impact. So the economy is really into like a mini recession. Right, you have a COVID impact. You have the real estate impact.

Speaker 2:

So the economy is really into like a mini recession, right, think about how people feel and you don't have much fiscal stimulus like what happened in the US, in Europe, in China, because government people thought, oh, maybe after COVID government started to begin to stimulus, we have that hype September last year, right, like people think, oh, china could do like trillions and trillions of dollars like what happened in the US, to really bring the economy back to the growth, but it didn't happen. Right, it's way less than people expected. So the argument back then is, like China's holding that because they see this tariff's going to come in. So what they're going to do is really they're going to estimate the impact from the tariff so they can really size the stimulus package right. They can really determine how much they need with the print money or spend from the government to really offset the impact from tariff.

Speaker 2:

I think that's really rational. So think about, like any policy maker, right, you think about like this uncertainty from the tariff, how much they're going to damage the export sector of china, like those small factories in the south. Then you really need to help like very laser focus on those, but as well as like the total spending package from the government. So it makes more sense to for them to do that. Yeah.

Speaker 1:

When I hear you say that, my mind goes to how do you even estimate the real effects of these tariffs if there's no clear clarity as far as whether Trump whipsaws the world or not? Right, I mean, for all we know, tomorrow he could totally change his mind and say you know, we're going to change up these formulas or we're not going to have as many tariffs as can be on specific things. How does any country properly plan a stimulus package around domestic consumption if there's no real clarity on the policies of the US?

Speaker 2:

I think that's the problem. It's a problem for every country and a problem for well, you're definitely going to have like a negotiation along the way right, like what's the size and what's that? I think, like just on the China side, they're going to just size the. They have probably have like a plan A, plan B, plan C and, based on like the real negotiation result, they're going to carry out those plans. So that's kind of like more rational plans. So far we don't hear what's kind of like the real negotiation is happening right now. But we have seen Trump is really using oh, how about a TikTok deal? How about that deal like Fanatol, everything that's part part of the on the table. On the table like you're going to have, you're going to have eventually some negotiation.

Speaker 2:

Then China's China government side knows what the size of the impact going to be.

Speaker 2:

So they're going to determine that plan right. So I would think that's more like the past going forward for China to really do stimulus. But I think another factor is, after the years of kind of a deliverance on the real estate side, things start to stabilize in China and also all those investments into the technology side, especially internet companies, there's growth actually start to pick up coming out of the recession right, coming out of this, those like deleverage. So I think China's government also want to see how that's going, because, of course, real estate is a big part it's probably like 30 or one-third of the economy but when growth started picking up, maybe China's kind of. Really we don't need such a big stimulus to really help the economy to grow again, right? So so far, I think a lot of analysts already revisioned their earning growth estimated for China internet name. So that's kind of like a positive sign on the fundamental side because of what happened, like this deep seek and AI and a lot of the technology investment.

Speaker 1:

And talk to me about what's going on on the ground as far as AI implementation. I think in the US, the criticism which is one that I have, at least is that there is all this hype around AI and productivity benefits, but it doesn't seem like there's that many companies actually reaping the rewards of that. Is it different in China? I mean, are we seeing on the ground in China far more AI integration, far more of a link between AI profit margins of various companies?

Speaker 2:

Well, we actually have a partner on the artificial intelligence space in the West Coast. So they're kind of like AI native investors, engineers like, who used to work like in open AI or working, and they're autonomous driving companies. So we have a constant like a uh a dialogue with them, like on just what happened in the U? S and AI, what happened in in China. They have some analysts in China as well. So the thing we see, what happened in AI application, is really beyond the surface, right. So, because what people are using like AI is like real chat to BT like or image generation, but that's only like fractional of the use case for AI. What's really happened like I think it's meaningful is really on the enterprise level. So there's a lot of enterprises beginning to like adopt AI level. So there's a lot of enterprises beginning to adopt AI. We're talking about just traditional inventory management, enterprise solutions, predicting your sales and doing logistic planning. Those are things we call the ERP or traditional use like digital twin to create a digital system for your company. But now your AI can really adding like intelligence to that digital twin, right you, you can really creating a data logic and like action intelligence to really automate a lot of things. So efficiency can be massively improved for a lot of retailers, manufacturing and for healthcare side, that's a lot of AI development on the new drug discovery. On the insurance, financial side, talking about policy underwriting is really cutting time from two weeks to 30 minutes Things like that just creating trillions of value.

Speaker 2:

I think One of the biggest things I think we've been talking about is really coding, because the current AI capability in coding, the performance is really unbelievable. The way the AI can code is like 80% of human right, so that's going to create a lot of like productivity gain for the technology company. But also it's going to do a lot of things. I think that's kind of like it's the early stage of AI adoption for, like consumer side now, right, when, just like similar to many technology breakthrough in the history, like internet technology, breakthrough in the history like internet, like PC internet, mobile technology in cloud usually started with enterprise and then migrated to consumer when technology become mainstream, right. So we are on that edge like a lot of enterprises using now.

Speaker 2:

I think consumer application is going to come soon, especially with the AI agent. I think a lot of people are doing that application. It is similar in China. There's a lot of AI agent app that's really under development. That's really, I think, consumers going to feel the change, right, going to feel the difference, because a lot of AI agents that come like your personal assistant, they can do a lot of things for you link to your data, link to your app, and then they can automate a lot of decisions.

Speaker 2:

If you think about, like, book a travel if you go to anywhere, like they can book the hotel, book the flight plan, the travel, like logistic for you, or if you think about doing anything like organizing your email, like you see, I don't know about you, me, I receive like hundreds of emails a day. Or how do I prioritize, like, do analysis or auto reply those emails. I think there'll be agent available to do all this work. How much you would be willing to pay that right? Those are a lot of money, like, I think, consumers, enterprises willing to pay for those solutions and eventually they're going to be returned on investment to those AI companies.

Speaker 1:

Let's talk about, on the Craneshares side, agix. I'm going to share my screen as we're talking here. A lot of attention around AI ETFs in the US. Let's talk about the Craneshares product.

Speaker 2:

Well, agx is very different from many other AI ETF, which is like just traditional index provider, created based on either keyword, searching sectors, right, like, just like, not a way to play technology. Agx is really leveraged on the expertise of the venture capitalists and the AI native investors and engineers. So, like, the partner we have is really coming from OpenAI and all those large-scale model companies, so they know which company are really behind this wave of Gen AI and large-scale model, right. So there's an ecosystem, like what I said, application side, where it's really providing service for enterprises and consumers really to bring that Gen AI to real-life applications. Then you need infrastructure side, providing the cloud, providing cybersecurity, providing data storage, and you need the chips and all those materials to make those infrastructure. So this is a more comprehensive and a holistic approach to really investing in the Gen AI and large-factor model companies and really capture or diversify like a basket right, think about it. Most people investing in AI just Mac 7, right, but that's overly. Most people investing in AI are just max seven right, but that's overly concentrated. Like, if you just buy several max seven stocks as your AI play, you are likely to get more concentration risk compared to our 40 plus basket approach is likely to offer more comprehensive or capture broader opportunity from from AI in each layer of the ecosystem.

Speaker 2:

And, more importantly, when we look at AI investment and benchmarking, there's a critical part I think is missing in a lot of AI ETFs is the unicorns that are still private and is the large-scaleash-model companies. So that's why we made our first investment into a private AI company called Anthropic. I'm not sure if you've heard of Anthropic. It's the AI company behind the Cloud AI Cloud. They just published their latest Cloud 3.7 model. It's one of the top performing AI large-tank model in terms of coding. They have a very large share gain from OpenAI in terms of enterprise adoption.

Speaker 2:

So a large-tank model company like that is missing in a lot of AI companies when you're talking about this round of the AI opportunities really built around the Gen AI and a large-tank model. But you don't have that in your portfolio. So adding that private company into an ETF is kind of like innovation in the industry. But we think that approach, like many institutional investors in the element they have like a 5% to 15% investment into VC, I think, just as individual investors or financial advisors adding a private company into an ETF is like an institutional investor approach towards the long-term growth potential from artificial intelligence right.

Speaker 1:

Yeah, and I certainly I'm a fan of the weightings here relative to what you see in a lot of the other. To your point, max seven high concentration type of products how do tariffs longer term or maybe even short term impact the AI trade? I mean, clearly, when it comes to the US, to the extent that AI, or rather tariffs, cause volatility. The knee-jerk reaction to sell passive indices means all the top names, just AI or not, are going to get slammed. So there's a degree of just sort of the passive pressure on that end. But is there anything fundamentally that changes with tariffs and some of these companies on the AI side?

Speaker 2:

We don't see much like fundamental damage on the AI side because a lot of technology is really like you know, like just what I've described on those solutions, on those really new revenue generation right, those really infrastructure building, those are really technology breakthrough innovation that happened previously decade right. Like think about the internet, the mobile technology, the cloud. That's like a decade long investment opportunity and we are still at the early stage of that. So I think for any people investing AI is really you have to think about your investment horizon. If you just like what happened in previously like there's many volatile and short-term volatility happening on many other internet era or cloud era there's great company compounded return over the long term right, have a very meaningful short-term volatility. So how do you really think about that? Right, I think it's not up for every investor because you're going to have those moments like what happened with tariff. You're going to have those moments like what happened with tariff. You're going to have a meaningful short-term volatility, but you're going to have a. If you look at a much longer horizon, you have to position your portfolio where the growths are right. So artificial intelligence in the long term is going to have a meaningful compounded growth, because all the AI term is going to have a meaningful like compounded growth, because all the AI innovation is going to happen. It's going to disrupt the whole business and create a much higher revenue for a lot of companies going forward.

Speaker 2:

But in the short term, that headline risk or the trade related tariff, that's going to hurt the multipleations and sentiment, right. So that's like, how do you really justify that? Right, I think, just be strategic and be disciplined, right? So when you have an allocation to a long-term market, I think artificial intelligence is a great fit for a long-term investment. And I mean, like, since I'm now discount right now, so valuation is much cheaper, so for any long-term investors, it's actually a great opportunity for them to buy those assets at a discount, right?

Speaker 1:

what is the, what's the state of sort of consolidation when it comes to AI names, whether it's US specific or China specific? I mean, I don't know what goes on on the ground in China, but, you know, are there AI companies that are merging and taking over other AI technologies. I mean, what's going on there?

Speaker 2:

there's a lot of private like there's a lot of private companies, I think partner with the public companies. So basically, leverage the private side of the technology breakthrough is gonna help a lot of like public companies Just for now. But, like I think, at Alibaba they invested a lot of like private AI unicorns and now they come up with their own large connection model which is top on the performance. So I think with that consolidation, a lot of like private companies they're kind of like become there's a lot of like private companies. They're kind of like become there's a lot of like startups that are going to become like more relier, rely on the resources from the large companies right Given the market volatility. So that's kind of like a thing that like.

Speaker 2:

China internet companies can do more with the private side to really bring on those technology to their use cases.

Speaker 1:

I feel like we should talk about currency movement in all this, especially the way that the dollar has been behaving relative to yields. By the way, it used to be the case, for example in the US, that a strong dollar would mean yields would drop. The last several years, it's been the exact opposite, and now the dollar is weakening against a broad basket and yields are dropping. How does currency movement impact the AI trade, if at all, and, and In general with tariffs? Can China just respond by manipulating their own currency further?

Speaker 2:

Well, I think, just like you think about the goal of Trump administration really to how can the US really rebalance this trade deficit. I think the only way is really to depreciate the dollar right, like have a weak dollar. I think the only way is really to depreciate dollar right, like have a weak dollar. Think about the mechanism of why there's a lot of trade supplies is because strong dollar and dollar as a global currency like when China sold a lot of goods to US they keep dollar as reserve currency and buying more treasuries right, us treasuries so then dollar can become stronger. So that game has been going on for a while. Right, when you have a strong dollar, then trade deficit. So I don't think, like, unless you have a meaningful depreciation on the dollar, that trade balance, trade imbalance is unlikely to be adjusted. So think about that.

Speaker 2:

What can happen is, I would think, china likely to.

Speaker 2:

Really they have a huge currency reserve in dollar, so they can use a lot of those currency reserve to really manage the risk from the US side, like, if the US dollar is going to depreciate, rmb is going to depreciate.

Speaker 2:

That's probably going to be part of the negotiation between US and China. So on the currency side. But generally on the technology names, I don't think that's kind of like a meaningful impact on a lot of either US tech or China tech, because currency impact is less meaningful when it comes to the earnings growth and revenue growth for those tech tech and tech names, because for US tech and tech names most revenue is still from domestic and for China is the same. So I don't think that's like a meaningful impact on the business side. But generally like a weakening dollar means there's like global investors are going to their US investment going to depreciate, right. So that means likely the more diversify away from the US asset. So we have been seeing that, like in Europe, right, some like China. So I think if dollar continue to depreciate, that asset flow is going to continue for a while.

Speaker 1:

Talk to me a little bit, just high level, about Craneshare itself. I mean, you guys are real thought leaders when it comes to a lot of different parts of the marketplace, but obviously you know focus on the China side quite a bit. Talk to me about the depth of experience, expertise, how your thoughts and research may be or may not, may not go into the construction of the funds. Any kind of context like that I think would be helpful.

Speaker 2:

Yeah, so I think we have we're like laser focused on a lot of our research topics, especially on the technology side, on the China side, and on a lot of our pillars of strategy. We have a dedicated research team on each pillar of our business and we work with a lot of third parties as well. Like I said, we have a venture capitalist partner. We partner with many other parties in the industry to really leverage their expertise as well. So it's a very comprehensive approach and we have teamwork.

Speaker 2:

We have monthly meetings and really discuss a lot of our strategic planning for the product, for our positioning, our solutions when it comes to product development, for our positioning, our solutions when it comes to product development. Like we think we really have to be thoughtful on portfolio construction, like just strike, a very well-designed index, because a lot of our ETF is actually tracking the index. So we have to really think about, like the portfolio construction, how to really best position ourselves in terms of the index investment. So that's kind of like our approach as a like a crunchers, like a star leader on China, climate alternatives and technology space. We have been really using that approach to really doing research and really building our research into our index products.

Speaker 1:

Does a day like this excite the team at Craneshares when you get this kind of volatility? You know I always go back to because I deal with a lot of fund issuers. I think fund issuers like when the S&P goes down hard because to some extent everyone's competing against that Home bias, availability heuristic as far as the definition of in quotes, the market. If you're going to try to grab flows, you want to see volatility. Do you see, like, do these kind of periods get everybody even more invigorated?

Speaker 2:

I think it's kind of like for crane shares. We do have a lot of well China solutions and alternative solutions for especially like a market moment like that for risk management. So from a business perspective, it's definitely like a kind of like validation for our product solutions that you really need to diversify your allocation outside of just 100% US and you really need to really manage your risk, like what happened to like institutional investors. They have really a decent allocation to alternatives. So from Cranesha's product solutions, we think this is kind of like market.

Speaker 2:

We have been really thinking about and offering the right solution for our investors to really create a diversified portfolio. Right, so, um, but like that's kind of like not common in an industry. I feel like most people just think about this only. Like sp500 is the only only thing I look at, right, that's happened to many investors as well. Uh, for many, many years. So common, right, like when you have that mentality for like every quarter, right Four quarters a year, then that mentality become like a fixed mindset. So diversification is not a thing like people like to struggle, right, but like I think now it is very different. Like when you have like micro uncertainty, when you have what do you say like currency risk on a lot of US currencies, so that's kind of like a moment for diversification. So I think our business, especially our China side and alternative side, is really creating that solution for diversification for investors.

Speaker 1:

Let's talk about the types of investors that go into some of your funds. You mentioned alternatives, you mentioned the climate and then, obviously, we talked about AI and China here, focusing on China and the intersection of China with AI, is it one of those things where you typically see, for example, financial advisors, you know, do a very small allocation to this part of the investable landscape, you know, somewhere in the 2-3% range or do you see that some people actually take much more aggressive bets? Because, let's face it, the biggest criticism around investing in China is that it's, in quotes, uninvestable, right, and I always go back to it's uninvestable until it's trending up into the right and then suddenly it's investable.

Speaker 2:

Exactly, I think, like our business has been involved in terms like client base, I think, starting the business. Most of our investors are really financial advisors and retail investors. That's like 10 years ago, financial advisors and retail investors that's like 10 years ago. But as the business involved, more and more institutional investors are using our ETFs for China allocation. That happened especially around, I think, like it's really using K-Web. When K-Web's really become kind of like most liquid and very sophisticated tool for a decent China allocation and that's when China's allocation become like a meaningful part of the institutional investor in the US as well. But since the start of change I've been going like when I back in 2018, when Trump first turned and threw in China trade war, I think that created a lot of uncertainty on China investment, so our clients from, especially, financial advisor side decreased dramatically. So a lot of advisors divest to China. But the institutional use of our ETF is actually increasing. We see more and more institutions using institutional investors, especially a lot of big pensions, big hedge funds even, are using K-Web as an allocation or tactical investment tool. So that trend has really, I think, has been going for the past five years, but until now, I think, with the diversification in mind. I think the more and more conversations around like, oh, how can really using China for diversification when China's at such a low valuation? And there's actually upside with the deep secret with the AI adoption in the China internet names, I think that's a conversation that's picking up. But, as you like, we all know this has been a mindset for many, many years, so a change of that mindset can take longer than people expected. But I think the institutional investors are happy to adopt and change. Then I think more and more other type of investors are going to follow that. Yeah, so that's for our China side, then for, I think, the alternative side I think that's more institutionalized of the financial advisors. I think there's a lot of independent advisors. Their sides become more manifold, so their way to allocate is becoming more like institutional investors where alternatives, and especially like managed futures or hash equity, become a bigger part of portfolio to really creating a true diversification for, like what happened, a growing allocation from those advisors.

Speaker 2:

For the carbon side, it's interesting because it's purely institutional. Most investors in our carbon solutions are institutions and it doesn't really resonate well on the advisor side. But things are changing. I think more and more advisors are learning about the carbon space and adding allocation to the carbon. So it's a very interesting mix of the three pillars of our business and I haven't mentioned about our technology. The AGIX so far is mostly financial advisors and retail investors. Given the size and the kind of like we just launched it last year, so you haven't become available for a lot of institutional investors. But we got most of the feedback on the AGIX because our investment into Anthropic I think a lot of people starting to notice that as a unique solution in the industry, because there's no such solution to adding a private AI unicorn into an ETF like that. So that's the picking up among investors who want to get access to that part of the investment.

Speaker 1:

What do you think most people get most wrong about investing in China? I know it's a broad statement, but there's always misconceptions, right? So, from the kinds of people that you talk to, the kinds of things that you see, what do you think is the thing that most get wrong?

Speaker 2:

I think a lot of people just thought, like, when there's a cycle anywhere, there's a cycle in China. So a lot of people think China is all in West Boat because of politics, because of geopolitical, but end of day is economic cycle. So we have seen that cycle is down. Now the cycle is picking up. The violation is down, now violations should pick up. So just every country, there's normal normalization, there's main convergence, um. So that happened in the us, that happened in china, um. So we think, like always, like people usually just focused on media, focused on macro, focused on geopolitical event, but like, end of the day, it's about earnings, it's about like earning growth, it's about earnings, it's about like earning growth, it's about multiples. So I mean like I think that's kind of like first thing people get around because, end of the day, china's investment. Those are companies that just like listed by well, like just managed by, like entrepreneurs like you and me. So basically, that's a business. You have to evaluate the business investment like many other business in the world.

Speaker 2:

Second thing I would think is the misconception in the innovation in China.

Speaker 2:

A lot of people think like China is kind of like industrial right, like we're manufacturing during the economy, like industrial right, like we're manufacturing during economy.

Speaker 2:

But when you look at like the demographic in China, people always talking about aging population but people didn't notice there's a generation evolution, I would say, because the younger generation and the previous generations are totally different.

Speaker 2:

Generation, I would think, because think about like the people about 40s in China, their whole background when they grew up is kind of like when China has not much education, there's not much industrial, there's not much international access. But the younger generation is much behavior, like a Western mindset, with tons of access to internet, to innovation, education. We're educated a lot of like college degree, graduate, uh, engineering degree and they've been like very uh focused on innovation and um creating like new business models. So that generation shift is gradually happening because those younger generation become come like the main labor force and the business owners were Chinese companies and that's going to create a dramatic shift in the economy because people are different, people's minds are different, people's ability is scope, their way of doing things that are totally different now. So that makes China an interesting place where you have a different group of people. Becoming the mainstream is going to create, I think, like tons of innovation and investment opportunity for the global investors.

Speaker 1:

There for those who want to track more of CraneShares' research and learn more about your funds in general. Where would you point them to and then maybe provide some final thoughts for those that just want some calmness after such a crazy day?

Speaker 2:

Oh well, like anyone who want to follow our research can go to cranesharescom for the AGIX fund. Like you can go to cranesharescom slash AGIX fund. Like you can go to crinciouscom slash AGIX. And, as I said, like I think, just when you have like this moment, like today, I mean people feel pain, right, feel like fearful. You know it's like our brain is like animal, right, when you see the market going down, you just feel that like painful and you're gonna escape, right.

Speaker 2:

But I think, like there's many moment like this in history before and after a while, after, after all the headlines, after all this macro uncertainty, um, in the long term, it's the weighing machine on the earnings, right, so the earnings is still good, um, I mean, like those businesses still doing great, like they're being innovated, they've been developing new products, they're being, uh, generating new revenues and creating a solution that's really meaningful for, I think, human beings and you and me. Um, so those are great business to own in the long term, right? So the short term is creating volatility but also a buying opportunity, because those are great business to own in the long term, right, so the short term is creating volatility but also a buying opportunity, because those are now think about like a business is at discount, so you should buy the business at discount. So if you think about a way, if you think of a way of investing like that, you'll feel more comfortable about the market today, right?

Speaker 1:

Very well said, appreciate those that watched this live stream. This will be an edited, webinar-sized podcast available on LeadLag Live on all your favorite platforms. Again, this is sponsored by Craneshares. Hopefully you'll do this again with Derek, maybe on a more calm day, although, who knows, I don't mind. Being in an age of turbulence, I think that's where the real interesting strategies start to stand out. So thank you Derek, thank you buddy, I'll see you next time.

Speaker 2:

Thank you, Michael Cheers, everybody.

People on this episode

Head Shot

Michael A. Gayed, CFA

Host