Investment Outlook: China First to Face Wave of Uncertainty
Jan van Eck, CEO
March 20, 2020
Q&A on Navigating the Markets with Jan van Eck and Team
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Heading into 2020, we felt that central bank policies in the U.S. and China would adequately support global growth, and my investment summary for 2020 was “Don’t worry; be happy.” Since then, the coronavirus outbreak occurred in China and spread, causing a global slowdown—a de facto recession. This slowdown is reflected in lower stock prices, lower commodity prices and historically low interest rates. Now, we are monitoring two separate coronavirus scenarios, one in China and one in the U.S., in terms of (a) the date of the peak coronavirus health impact and (b) the amount and length of economic slowdown.
China is ahead of the world from a recovery perspective and dealt with it in its own way. As could be expected, China’s official activity gauges for February were hit hard, with the manufacturing Purchasing Managers’ Index (PMI) falling to 35.7 and the services PMI to 29.6. The key now is to watch the pace of recovery and the extent of economic support, through monetary and fiscal channels. But economic activity is already recovering as the number of new coronavirus cases fall. China’s stock markets seem to expect a recovery as their stock markets haven’t fallen as much as other global stock markets.
One area in China to keep an eye on in the next few months is support for private manufacturers. This was the weakest part of the Chinese economy heading into the coronavirus situation, and is what we will be watching if and when the coronavirus episode ends. Interest rates for private companies in China still had not come down much from the 2018 credit crackdown. If private companies in China can’t finance their way out of the coronavirus situation, this will become a bigger issue. Not surprisingly, the government has just approved a special package, in the form of lower social security payments, to help small and medium enterprises stay afloat, and we will closely monitor the effect.
We have little idea of how the scenario will play out in the U.S. and Europe. We don’t know yet when health care systems and public action will cause a peak in the coronavirus impact. And, we don’t know how growth in the U.S. and Europe will be affected.
And markets really don’t like this level of uncertainty, which is why we’ve seen the recent sell-offs.
What Should Investors Do?
I suggest that investors try to have a view on when they think the virus’s impact will peak and then have a view on the depth and length of the recession. I think the virus will peak between mid-April and mid-May. I’d also guess that we will know about economic activity around the same timeframe because companies and the government will be reporting economic statistics, some of which will not be good.
So there will be a month of uncertainty, and then the final factor: when will the markets have fully anticipated everything? Again, I’d consider positioning over the next month. Interestingly, we just looked at discounts on fixed income ETFs, which appear during times of stress. Those discounts often take about three weeks to go away.
In this context, here are several actionable ideas:
Focus on the long term. If your plan calls for rebalancing your portfolio between stocks and bonds, then you will probably be buying stocks at some point, which seems reasonable given the recent run up in bonds and drawdown in stocks. Our general approach to portfolios is that they should not be moved around significantly on a short-term basis. Investors should stick with their long-term allocation. In other words, ignore market noise or volatility as much as possible and stick to your financial plan.
Consider buying commodities or energy shares as a tactical trade. During market turbulence, investors can ask, “Is there a price that I should buy an asset regardless of what’s going on in the short term?” Certainly, many investors do that for individual stocks they know well. For some asset classes, technical measures can be a good guide. Oil, for example, is hitting 2015-2016 lows, which was when “old China” was shedding capacity and there was shale supply surge. Energy stocks have been underperforming over the past decade, while FAANG stocks have gone from arguably fairly valued to being arguably expensive over the last three to six months. Microsoft and Amazon each have a greater market cap in the S&P 500 Index than the entire energy sector. I think this is a sign that energy could be a 10-year trade. In an overall global asset allocation, we would consider overweighting energy. Commodity and other markets are pricing in a global recession. If you foresee an economic recovery, this could very well present an excellent buying point for this energy trade.
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I hope this update is helpful, and I welcome comments, as always.
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