Category: China (Page 1 of 2)

WCM Chart of the Week for February 8, 2021

What does a pledge from China of carbon neutrality by the year 2060 actually mean, and how do we measure progress? There are various global targets for climate change mitigation that attempt to quantify what needs to be done so that the global system does not exceed the point of no return, generally seen as a rise of 1.5 – 2.0 degrees Celsius. Under the Paris climate accord, a number of nations committed to carbon neutrality in the next 30 years. China said 40, but as the largest economy on Earth how do we measure their progress? This week’s chart from the US Energy Information Administration country analysis of China (Sept. 2020) is just one hint at the structural challenges China faces in achieving the target. On a per-capita basis China’s carbon footprint is still smaller than the developed West, but their total footprint is more than a quarter of the world’s total output, and their energy mix is just 15% non-carbon and more than half coal. After the pandemic interruption that marked the period around the Lunar New Year, China’s carbon output returned to or even exceeded pre-pandemic levels. We are looking for the steps China will take now to level out carbon growth so that it can begin reversing the trend after 2030, and wonder, even worry whether another 10 years of increasing output takes us past the global point of no return.

WCM Chart of the Week for February 2, 2021

It is not surprising that China’s carbon emissions are growing given relatively strong economic activity compared to the developed world. Or perhaps it is given China’s pledge of carbon neutrality by the year 2060. China’s contribution to carbon in our atmosphere is approaching 10 billion tons annually, an amount that is greater than the US and Europe combined. To place that in context, according to the World Bank, as of 2019 the Chinese economy is only 38.6% of US and EU economic output. It is important to note that carbon output in the US and Europe has been steady and even declining as their economies are expanding. Another startling fact is the Chinese economy represents 16.3% of Global GDP (also World Bank data) and yet contributes nearly 29% of the 34.2 billion tons of carbon emissions, according to the British Petroleum Statistical Review. In our view, China has a great deal to do to meet its 2060 carbon neutrality pledge on its way to becoming the world’s largest economy, starting with action on its COP21 Paris commitments including reducing its dependence on coal.  [chart courtesy British Petroleum Statistical Review, © 2021]

WCM Chart of the Week for November 30, 2020

Beyond the rosy headlines of a strong economic recovery and a rally of over 40% in the Shanghai Shenzhen CSI 300 Index from the depths of the pandemic, trouble may be brewing in China’s bond markets. Total debt in China was approaching 325% of GDP in 2019, a point that economies generally struggle. The largest segment of total debt growth from 2018 to 2019 was in the corporate sector, which rose from 165% to 205% of GDP. China’s 2019 corporate debt binge appears to have hit a wall. According to Chinese media reports as much as 69% of private enterprises have defaulted on their outstanding loans so far in 2020 and the festering crisis may impact local governments and state enterprises as well. Further deterioration in the Chinese financial system would obviously have negative implications for the rest of the world.

WCM Chart of the Week for August 28, 2020

The US stock market continues to rebound from the pandemic panic-driven lows, with the NASDAQ and S&P 500 continuing to post new all-time highs over the past several weeks. This is prompting investors to question if the current rally can last, or even if it marks the beginning of a new bull market.  There are risks that could derail the stock market’s advance ranging from tensions with China, resurging virus hot spots, social upheaval around the country, and the upcoming national elections. The US labor market is also a persistent drag and will not likely have recovered until well into 2021.

There are several factors that are supportive of asset prices including unprecedented fiscal and monetary support, and mounting positive momentum in key economic sectors such as manufacturing, housing and the consumer.  As previously mentioned in our COTWs, in the US personal savings rates remain elevated and personal balance sheets have been de-levered, suggesting the consumer has the ability to spend if they wish.  This week’s chart highlights total assets in money market funds, which remain near peak levels suggesting private investors have been underexposed to equities during the stock market’s historic recovery rally.  This is a condition many cite as additional evidence that equities could continue to advance higher in the months ahead. [chart courtesy Bloomberg LP © 2020]

WCM Chart of the Week for June 19, 2020

Chinese Communist Party (CCP) aggression in the Asia-Pacific region is on the rise. Military tension along the Himalayan border with India resulted in some 20 Indian soldiers perishing this past week. Chinese naval ships have been harassing the Japanese commercial fleet in the East China Sea, and exhibiting similar in Vietnamese, Malaysian, and Indonesian trade routes in the South China Sea. Domestically, the CCP is suppressing Hong Kong freedoms in violation of the 1984 Sino-British Joint Declaration. Globally, the lack of COVID-19 related contrition or even transparency regarding the origin and spread may all contribute to China-related backlash or retaliation. Nearly all Pacific nations have aligned with the US against Chinese aggression. We find it odd that the CCP has chosen hostility in their weakened economic condition, a moment when they really need the rest of the world for their own recovery efforts. Unfortunately, this situation is unlikely to de-escalate anytime soon.  As an example, China’s defense spending is approaching four times India’s and that military show of strength compromises the Asia-Pacific region’s stability and sovereign rights. [source: World Bank and Bloomberg LP © 2020]

The view from here

In these last hours before the US markets open for this week’s sessions, here are a few more thoughts we have shared in our community.

Global markets finally caught up, in the negative sense, to China’s stock markets as worries about the COVID-19 “novel” coronavirus spread to the developed West faster than the disease itself. A contagion of concern overtook markets and left us with a week of returns we have not experienced since the Financial Crisis in 2008. What is materially different from our perspective is that this correction is not a response to a lack of faith in the system itself. During the Crisis, securities prices collapsed on the fear that it was actually impossible to value many of them, and that large parts of the system were in fact worthless. In certain cases this did prove to be the case as a sudden disappearance of liquidity exposed a large quantity of bad loans and mortgages that had been ingested by major financial institutions, causing the collapse of systemically important operations like Lehman Brothers, Bear Stearns, Washington Mutual and Countrywide. There was absolutely widespread panic that we could be facing a new Great Depression as the financial system itself seized.

This past week was very different. As we have previously explained, COVID-19 of course has and will continue to have economic consequences, but it does not call into question the soundness of markets, banks and whole economies as we experienced a dozen years ago. We find it likely that the response to the virus will impact company earnings and the GDP of nations. Shutting down the 2nd largest economy (China) for weeks if not months would never have gone unnoticed and unpriced. Reasonably, that demands revisiting what companies are worth and whether yesterday’s prices reflect tomorrow’s realities. Prior to the outbreak, fundamentals were reasonably solid around the world. Not boom, but certainly not bust. The situation we find ourselves in could take that optimism down to modestly solid, or perhaps slightly weakened. But even a mild global recession triggered by this moment does not call into question the fundamental underpinnings of finance and commerce. We are seeing steep and sudden drops in stock markets that remind us of 2008, and nearly unprecedented lows in interest rates, without anywhere near the breakage that brought about those kinds of corrections historically.

So, in a word, why? We see a few different forces at work which all feed our collective response to unconstrained uncertainty. Emotion, namely fear, is always a powerful motivator. Fear of the virus, fear of losing money, reasonably make people want to be safe. 2008 still looms large in the minds of investors and a PTSD-type response is not out of character. Fool me once, shame on you. Fool me twice, shame on me.

That emotion is being fed by a toxic brew of real, or worse, real but incomplete, data without framing or context, and quite a lot of false narratives. Add to that the markets are now patrolled and exploited by algorithms and artificial intelligence engines that can actually capture and quantify shifting sentiment and strong moves one direction or another in prices, and exploit or even amplify or aggravate those moves for profit. We have seen numerous isolated examples of this played out in the “Flash Crash”, the “Fat Finger”, and other moments over the last many years which show how quickly and to what extremes things can break loose on little information or bad information. Throw something at the market like the novel coronavirus and we could experience those types of extreme (over)reactions again and again.

We anticipate that clarity and greater understanding around the virus’ pandemic qualities and impacts will help markets firm up, and would not be surprised to see a fair price for securities settle at something less than the peaks from just a couple weeks ago after accounting for the drag from lowered economic activity. It is also our expectation that we will see some manner of coordinated global response across the major central banks to compensate not for falling stock prices but for potential lost GDP from less commerce, less travel, and less work. Depending on the magnitude of the response this could put a floor in prices, or at least slow the descent and tamp down volatility while investors regain their footing.

WCM Chart of the Week for February 28, 2020

Heightened fears of COVID-19 spreading to other countries and regions over the past few days has unnerved investors and sent global equity markets lower.  Since hitting an all-time high on February 12th, the FTSE Global All Cap Stock Index fell 6.4% just through February 25th. Taken in context, global stocks may continue this week’s trend.  In 2003 the SARS pandemic temporarily derailed the post dot-com recovery in the U.S. The S&P 500 Total Return Index contracted nearly 11% from late November 2002 through early March 2003.  The Zika virus outbreak in 2015-16 also had a similar impact on stocks as the index fell 12% from late July 2015 until bottoming in mid-February 2016.  These instances are cited in this week’s chart.

The corporate environment in America is still quite strong compared to the two periods cited above and the rest of the world today.  One indication can be found in credit markets where investment grade corporate credit prices continue to grind higher in the midst of stock market volatility.  The toll on the human condition is tragic but our sense is that this will pass in time and may turn out to be shorter in duration due to advancements in biotechnology. That is certainly our hope but in the meantime equity markets will likely continue to be volatile. [Data courtesy S&P, chart courtesy Bloomberg LP © 2020]

Less than a novel on novel coronavirus

Following are a few notes we shared with our clients and their trusted advisors earlier in the week that we think warrant repeating as we finish what has shaped up to be the worst week in the markets since the Financial Crisis.

COVID-19, popularly and generically referred to as “the (novel) coronavirus” has become that X factor we look for that comes from outside the markets and the normal news cycle to disrupt the status quo. While issues we have previously discussed like Brexit, the Hong Kong protests, and Iranian conflict are meaningful, markets generally take them in stride and try to price the risk. It may result in days or weeks of volatility, but eventually investors settle on how to value it. COVID-19, like Zika and SARS before it, is different. Brexit or HK are the product of people making active decisions. They may be decisions with adverse outcomes, but they are understandable, observable, and follow some kind of reasoning, whether or not we agree with it. Something like this virus introduces another dimension of uncertainty, because for now, we do not fully grasp the impact it will have on global health. So, even though we can observe and predict human decisions on how they are likely to respond to set information, the responses are and will continue to be dynamic based on the emerging understanding of and consequences of the virus.

We are not doctors, nor do we play them on TV, but we have been closely following not just the news cycle, but the output of expert organizations tasked with addressing this challenge. Indications continue to be that it is more easily spread than SARS and the bird flu, but the health impact appears to be less for healthy populations and the fatality rate lower for at-risk individuals, although most definitely and regrettably not zero. That does not mean this is something we take lightly either as investors or as global citizens. But it does help us chart a path forward. In the near term, the containment efforts are aggressive and the impact on society and commerce severe. As we have seen in China and now in South Korea, this has had an enormous impact on daily life and stopped business more or less in its tracks. The latest round of market reactions was triggered by a cluster of cases in Italy, which brings developed Europe into play. Emerging clusters in other areas like Iran suggest that with China as the vector, anywhere globally they have engagement and influence is a likely launch point for more cases. Inevitably this will lead to spread in parts of the world that either do not have the autocratic control of China or the health care infrastructure of Italy or Japan to address them, and we could see this accelerate to a global pandemic.

But, as counterintuitive as it sounds, from the investor’s perspective this may not be the worst thing. The economic damage being done is mostly from the preventative measures being taken to slow or stop the spread of the virus. Public transit is halted, air travel grounded, borders closed, events canceled, factories shut down, etc. If we find ourselves at a moment where these measures no longer restrain the spread of the illness, the focus will shift to healthcare and hygiene, as with seasonal flu and other communicable illnesses, and business ought to return to some semblance of normal. But in the near term, we are observing the volatility that comes with uncertainty, and also expect some degree of repricing as global economies absorb the consequences of lower activity. It is also not out of the realm of the possible that central banks will follow China’s lead and intervene to keep the economic engines running.

WCM Chart of the Moment for February 3, 2020

In the wake of Brexit and the risk of a pandemic it was time to take a diligent step back and compare current happenings with a bit of history. As the Coronavirus spreads within China and the WHO raises the specter of a global pandemic, investors have become concerned about the impact on the human condition and the global economy. During the SARs outbreak in 2003, Chinese economic activity was sharply impacted as GDP decelerated from 11.1% to 9.1% in the second quarter of 2003, and retail sales growth plummeted from 11.1% to 4.5% in the April to May months of that year. The SARS epidemic may, in contrast, look reasonably contained given what we don’t know about the Coronavirus. From a global economic standpoint, the Coronavirus impact is likely to be more severe given that China’s economy in 2003 represented a much smaller share of the world and it was much less consumer-oriented then.  Chinese officials have limited travel and quarantined large segments of their population in order to limit the spread of the virus.  Those actions will likely lead to stunted manufacturing output, and more importantly lower levels of consumption and retail sales which today represent a larger share of China’s economy.  The impact of an even slower growing China will likely be a challenge for growth in the rest of the world. [chart courtesy of Bloomberg LP © 2020]

WCM Yule Chart for 2019

Nothing says holiday cheer like Asian exports. Actually, come to think of it that probably says a lot about holiday cheer depending on what is under your tree, menorah, or Festivus pole. Equities in Asia have been rallying since early this Fall but have underperformed global peers this year. But, on a positive note, container traffic in Singapore just hit an all-time high, which should be supportive of Asia’s bourses going forward. The reason container traffic is important is because it is a barometer of trade momentum in the region and Singapore is a strategic transfer point for goods. Its exports hover around 200% of GDP.  Trade flows should continue to improve with Phase 1 of the US – China trade agreement and US House of Representatives passage of the US Mexico Canada Agreement (passage in the US Senate is likely).  These developments are critical considering global economic activity is moderating. [chart courtesy Bloomberg LP © 2019 and Maritime & Port Authority of Singapore, MSCI]

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