Category: China (Page 2 of 2)

The view from here

March 2, 2020 / Mark Sloss

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 2^nd 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

February 28, 2020 / Doug Wilde

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 12^th, the FTSE Global All Cap Stock Index fell 6.4% just through February 25^th. 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

February 28, 2020 / Mark Sloss

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

February 3, 2020 / Doug Wilde

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

December 24, 2019 / Doug Wilde

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]

WCM Chart of the Week for October 18, 2019

October 18, 2019 / Mark Sloss

Chinese officials announced year-on-year 6% GDP growth for the third quarter, which was slightly below consensus estimates of 6.1%. The main drag on the economy was slowing investment growth while factory output rose along with retail sales. Tightening credit conditions are also contributing to the moderation in growth as officials continue to address excesses in the financial system. The on again/off again US trade negotiations continue to be a source of uncertainty. The government’s target of 6-6.5% growth for 2020 is at odds with market forecasts. The International Monetary Fund (IMF) is expecting Chinese GDP to fall below 6% to 5.8% in 2020 and continue to moderate in subsequent years, slowing to 5.5% in 2024. In the near term, Chinese officials have ample fiscal and monetary flexibility to manage the economy. However, in the long run, the adverse impact of the one child policy will cause demographic trends to deteriorate rapidly. The National Bureau of Statistics previously announced that births dropped to 15.2 million in 2018, representing a 12% annual decline following a decline in 2017. Some see China’s population beginning to shrink as early as 2027 and others argue that it had already begun in 2018. A rapidly aging population will place strain on social services and likely constrain China’s fiscal flexibility in years to come.

WCM Chart of the Week for August 1, 2019

August 1, 2019 / WCM

The Hong Kong equity market, and in particular its world-class financial sector, has been a critical gateway for foreign investors to participate in and fund Mainland China’s economic resurgence over the past several decades. Lately, the Hang Seng Index, Hong Kong’s most recognized stock market gauge, has been selling off in response to pro-democracy and anti-extradition protests throughout the territory. Our concern is that the Chinese President, Xi Jinping, will lose patience with the uprisings and respond in a manner consistent with the 1989 Tiananmen Square Massacre when military assaults resulted in the loss of life for hundreds if not thousands of protesters. This is a risk that could derail the upward trend in global stock since the beginning of the year.

WCM Chart of the Week for July 12, 2019

July 12, 2019 / WCM

Welcome back from holiday. GDP growth in the Middle Kingdom has been slowing over the past several years and, as the world’s second largest economy, it has a significant influence on global capital markets. Our concern is that, while recent fiscal and monetary stimulus may have had initial positive effects, the impact may not be sustainable longer term. The country needs robust economic growth in order to support job growth and placate social unrest. Stronger growth would also help avoid a potential debt crisis as the pace of bankruptcies is accelerating – one indication that growth may not be as strong as it appears.

The official government figures for GDP growth – which we view with some doubt – stands at 6.4%, a level consistent with the Bloomberg Li Keqiang Index. The index itself has its limitations but measures the growth in bank lending, freight shipments and electricity consumption. It tends to over and undershoot the official figures and may provide a more realistic view on economic conditions in China. This indicator nonetheless bears monitoring as we await the June reading that will be out in days. [Chart courtesy Bloomberg LP (c)2019]