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Three Reasons China’s Markets Could Rebound

An upturn in China’s economy could improve the outlook for global growth and lift non-U.S. markets.

As we celebrate the Lunar New Year, this is a good time for investors to take a fresh look at growth prospects for China’s economy, and by extension, the global economy and non-U.S. markets.

In the past year, an index of China’s largest stocks is down more than 28%. That selloff is due to slowing growth. China’s 2018 real annualized growth rate of 6.6% doesn’t sound half bad, but it is the lowest level since 1990. Growth in the fourth quarter was 6.4%, the weakest since 2009.

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The consequences of slowing growth can’t be understated. China now accounts for nearly 20% of global GDP and 27% of the world’s manufacturing output. China is at the epicenter of global trade, with its slowdown reverberating around the world.

This year, however, a few of the underlying causes of slower growth in China may be in the process of reversing. Below are three reasons why I think China’s markets – and by extension, global markets—may soon rebound:

The Chinese government is adding stimulus. The government has embarked on a plan to stimulate growth, which includes measures that should enable banks to lend more, consumers to save on taxes, and companies, banks and provincial governments to issue more bonds (giving them more money to spend). For more on China’s efforts to stimulate its economy, see “Are Investors Too Cynical on China Growth?”

Trade tensions are likely to ease. We expect progress on trade talks with the U.S. to be positive as the March deadline approaches. That should improve sentiment and resolve some recent uncertainty around investments in China.

U.S. Fed policy is more benign. As the Federal Reserve has turned more dovish, indicating it will pause on rate hikes for the time being, interest rates have dipped and the U.S. dollar has weakened. This gives China more breathing room to potentially cut interest rates.

A final note is that, due to last year’s slide in stock prices, valuations of Chinese stocks appear much more attractive than U.S stocks. For clients seeking long-term growth, I believe adding exposure to China makes sense.

Risk Considerations

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