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    Investment Outlook: China Drip Stimulus Kicking In?

    Jan van Eck, Chief Executive Officer
    March 19, 2019

    Watch VideoMarch 20, 2019
    Investment Outlook: China Drip Stimulus Kicking In?
    Jan van Eck, CEO, shares his investment outlook.
    Watch Video

    Coming into 2019, investors faced two important questions: What are central banks doing, and what is happening with Chinese and global growth?

    At the beginning of December, we were worried about the impact the European Central Bank’s (ECB’s) and the U.S. Federal Reserve’s (Fed’s) continued tightening would have on the financial markets. Typically, central bank tightening is unfavorable for financial assets, and markets decelerated going into December.

    Then, suddenly the Fed signaled it would stop raising rates and reverse on quantitative tightening. This led to a rally in U.S. equities and other asset classes, but I view it as a glass half empty for the following reasons.

    Europe Reacts to ECB Tightening

    As soon as the ECB initiated a little bit of quantitative tightening, in the second week of December, the financial markets started performing poorly. For demographic and other reasons, Europe’s sustainable growth rate may only be zero, which indicates that it is not a significant contributor to global growth. However, it is very important in the global trade and financial systems.

    European Markets Seized Up Following ECB Tightening
    Eurozone Manufacturing PMI

    European Markets Seized Up Following ECB Tightening, Eurozone Manufacturing PMI

    Source: Bloomberg.

    The tightening by the ECB had a major impact, and I think the Fed’s decision to ease was made reluctantly. The Fed was also concerned about global economic growth rates, especially in Europe and in China. The financial markets have been going up since January, but I think investors should note that the Fed acted out of concern. Likewise, investors should watch these risks carefully.

    The ECB is also now changing course and moving to ease. At its March 7 policy meeting, the ECB pushed back its timing for increasing interest rates and is expected to stay on hold through the end of 2019. It also announced a program to stimulate bank lending, with another round of targeted longer-term refinancing operations (TLTRO) launching in September. TLTRO loans from the ECB provides banks in the euro zone with cheap rates.

    China’s Drip Stimulus Kicking in on Schedule

    At the end of last year, we said, “Don’t fight the PBOC,” which was an oversimplification of the fiscal, tax-oriented, and monetary steps being taken in China. We call it a “drip stimulus” because, rather than a big infrastructure stimulus program similar to what was implemented after the financial crisis, this was meant to be a more moderated program.

    Our expectation in December was that this stimulus would kick in around Q1 and Q2 of 2019, and it looks like we are on schedule for that. I think this is good news for Chinese equity investors in 2019, and I think it is just the beginning.

    Drip Stimulus Taking Effect in China?
    China Composite PMI1

    Drip Stimulus Taking Effect in China? China Composite PMI

    Source: Bloomberg.

    Portfolio Implications

    We always argue for diversification, though international diversification has admittedly been a tough story to tell for the last 10 years. The U.S. was going in one direction while the rest of the world was moving sideways. However, diversified investors have been rewarded over the last three to six months.

    The fourth quarter of 2018 was difficult for U.S. stocks, but emerging markets debt was flat and gold was up. And despite the trade headlines, emerging markets equities outperformed U.S. equities.2 So, while the U.S. economy may still be considered the strongest in the world, being balanced and continuing in a normalized interest rate environment, investors should stay diversified, especially in light of a likely cyclical upswing in China.

    For more insights on China, including the long-term transformation of the country’s economy and the growing role of private enterprise, please see VanEck’s outlook for China in 2019.


    1PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies

    2MSCI Emerging Markets Index vs S&P 500 Index

    The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

    Please note that Van Eck Securities Corporation (an affiliated broker-dealer of Van Eck Associates Corporation) offer investments products that invest in the asset classes discussed in this commentary.

    This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future results.

  • Authored by

    Jan van Eck
    Chief Executive Officer

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