Perspectivas
Global markets: China’s positive outlook may not benefit the rest of the world
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agosto 21, 2020
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Global markets: China’s positive outlook may not benefit the rest of the world
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agosto 21, 2020
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Global markets: China’s positive outlook may not benefit the rest of the world
Global markets: China’s positive outlook may not benefit the rest of the world |
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The rally in global markets appears to be slowing, even as the S&P 5001 finally regained losses suffered during the late February to March market plunge. Whilst there are tentative reasons for optimism, reflected in US and European manufacturing PMIs, and improving capex intentions, there are also indications of near-term deterioration in growth, supporting our view to stay cautious. In addition, the delay in an agreement on further US fiscal stimulus does raise the risk to the economic recovery, which is very dependent on abundant government support. This is a further reason to remain cautious. Moreover, unlike past crises we believe that the rest of the world cannot rely on China to stimulate and pull the world out of recession.
The signs continue to point to deterioration in economic growth in the near-term. In most Developed Market countries consumer confidence improved meaningfully in June, but has since come down in the US and stalled in the eurozone2. Savings intentions also rose in the EU, reflecting concerns over a resurgence of COVID-19. As discussed in previous notes, bankruptcies continue to increase and there is evidence in the US unemployment figures that temporary unemployment is turning into permanent unemployment.
China’s positive outlook may not benefit the rest of the world
We have had a positive view on China since we initiated an overweight position in February. This view has only been further reinforced subsequently and we added further to our China overweight during July. A number of factors are contributing to a positive picture for China. Fundamentals have been improving and not only is China ahead of other countries in its recovery from the pandemic, since 2018 broad credit growth has been and remains, a strong stimulus for the Chinese economy.
However, whilst their policy is benefiting China, unlike previous crises such as the Great Financial Crisis and the 2015 Chinese stock market collapse, we do not expect China to play the same key role in pulling the rest of the world out of recession. For instance, China is avoiding stimulating the economy through debt and is deploying less capex than in past crises. Secondly, China’s position has evolved politically over the years. During previous crises, relations were being built and there was the incentive to be co-operative. However, the US-China trade tensions over the past few years mean that China may not have the same political reasons to unleash stimulus on the same scale as before. The net effect of this policy shift is higher net exports and a reduced benefit for the rest of the world. Indeed, in July Chinese imports were up 13.2% over the past 3 months versus 18.7% for exports3. Therefore, we are seeing recovery in both, but exports are recovering faster.
Source: Datastream, Markit, MSIM. Data as of 5 August 2020.
Source: Datastream, Markit, MSIM. Data as of 5 August 2020.
Reasons for some optimism
There are reasons to be optimistic given some of the data is pointing to an increase in activity in 2H 2020. For instance, increasing corporate confidence is being reflected in improving US manufacturing capex intentions4. In addition, manufacturing PMIs have been strong globally, especially for Europe, but we are also seeing a rebound in the US, China and Brazil. New orders in Europe were strong, particularly with respect to Germany, Italy, France, UK and Poland. For Germany the increase can be attributed to pent-up demand, but also increased demand for exports to China. This is encouraging, especially in light of the fact we have been in a manufacturing downturn since end 2017 to the beginning of 2020. However, we believe caution should be exercised given manufacturing job cuts, and despite new orders and intentions rising, the absolute output activity is suppressed.
Whilst there may be some bright spots, as discussed in our last note, there is the potential for reversal in the positive economic data.
RISK CONSIDERATIONS
Diversification neither assures a profit nor guarantees against loss in a declining market.
There is no assurance that the Strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the Underlying Portfolios may be incorrect in light of actual market conditions and the Portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes.Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. Equity values fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds ETFs and other Investment Funds, the portfolio absorbs both its own expenses and those of the ETFs and Investment Funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio. Diversification does not protect you against a loss in a particular market; however, it allows you to spread that risk across various asset classes.
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Managing Director
Global Balanced Risk Control Team
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Managing Director
Global Balanced Risk Control Team
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Executive Director
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