Investment Outlook: China First to Face Wave of Uncertainty
Jan van Eck, Chief Executive Officer
March 20, 2020
Q&A on Navigating the Markets with Jan van Eck and Team
The current unpredictability and uncertainty in the markets are concerning for everyone, but it is important to remain calm. We know investors may have a lot of question. Watch VanEck’s CEO, Jan van Eck, and team as they answer crucial questions from the audience.
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.
Our Current Policies Regarding the Coronavirus
As a globally diverse firm, VanEck relies on the “head of office” structure whereby the head of any particular office, in conjunction with the firm’s Global Risk Committee, makes an assessment on appropriate actions, such as a temporary office closure. Beginning Wednesday, March 11, 2020, VanEck will institute a temporary work from home policy for all New York-based employees. VanEck opted to put this policy in place based largely on guidance from local public health and government authorities with respect to the use of commuter rails and mass transit in greater New York. When employees return to the New York office, it may be in shifts or all at once.
While the office is temporarily closed, you can expect the same level of quality client service that you are accustomed to receiving. VanEck has a plan in place for remote access connectivity for all employees. VanEck also has robust Business Continuity Planning procedures that have recently been retested, and we are confident that our firm will function to meet the high standards that clients and regulators expect and deserve.
I hope this update is helpful, and I welcome comments, as always.
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 or financial instruments 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/financial instruments 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.
Web Access Notice: VanEck is committed to ensuring accessibility of its website for investors and potential investors, including those with disabilities. If you have difficulty accessing any feature or functionality on the VanEck website, please feel free to call us at 800.826.2333 or email us at email@example.com for assistance.
This website is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this website. Nothing on this website should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.
Investing involves risk, including possible loss of principal. An investor should carefully consider investment objectives, risks, charges and expenses carefully before investing. This and other information can be found in the appropriate regulatory documents made available for a specified country as designated in this website.
Van Eck Securities Corporation, Distributor 666 Third Avenue New York, NY 10017800.826.2333