Lombard Odier sees pockets of opportunity in 'New China' as its value trap begins to diminish

Lombard Odier's John Woods sees emerging value in China, particularly in frontier technology sectors with strong government backing. He expects the Bank of Japan to hike rates three more times, including in December, which he believes could put a floor under yen weakness.

Analysis

The useful distinction is between policy support and investable returns. In Chinese frontier technology, state backing can lower funding and demand risk for selected businesses, but it can also direct capital toward competing capacity, compress returns, and make shareholder outcomes more dependent on policy priorities than end-market economics. The investable signal is therefore evidence of sustained commercial demand and improving cash conversion—not policy emphasis alone. Sanctions, export controls, and uncertainty over access to offshore capital remain material ways for the theme to underperform even if domestic investment rises.

For Japan, the yen thesis is a relative-rates trade, not simply a BOJ-countdown trade. Three hikes are Woods’s forecast, not established policy; any currency floor depends on the path being credible and on US-Japan rate differentials narrowing. A stronger yen could support import-sensitive domestic sectors while pressuring exporters’ translated earnings, so broad Japanese equity exposure is not a clean proxy. In the next 1–3 months, BOJ communication and US rates are the key catalysts; over 6–18 months, actual inflation, wage growth, and policy follow-through determine whether yen strength persists. With no pricing, positioning, or valuation data supplied, neither view is enough to justify an unconditional directional position.

Key Decisions for Investors

• China: keep frontier-tech exposure selective and sized for policy and liquidity risk; require company-level evidence of orders, cash generation, and returns on invested capital before treating government backing as an earnings catalyst. Reassess if support fails to translate into commercial demand or if export-control restrictions broaden.
• Japan FX: treat short USD/JPY (long yen) as a conditional 1–3 month expression, preferably after BOJ guidance and US-Japan rate differentials confirm the direction; avoid entering solely on the forecast of three hikes. A renewed widening in rate differentials or BOJ pushback would invalidate the setup.
• Japan equities: avoid using a broad index position as a proxy for yen appreciation. Monitor exporter earnings revisions versus domestically oriented firms and banks; a sustained yen rise alongside weaker exporter guidance would favor relative-value positioning, subject to valuation and earnings data.
• No immediate high-conviction trade: verify current market pricing of BOJ hikes, yen positioning, China-tech valuations, and actual policy-linked procurement or revenue before increasing risk.