On Friday, reports emerged that the White House was considering ways to limit US investment into the Chinese stockmarket. How this would be achieved is unclear. After the news broke, there was speculation that this could include limiting the amount pension funds can invest in the mainland China market.
Despite some recent signs of slowing down amid the ongoing trade war with the US, China remains among the fastest-growing emerging markets. The economy has been posting high single-digit GDP growth over the past two decades thanks to rising domestic consumption and infrastructure investment.
China has become a mainstream investment in many portfolios, and this is only likely to increase in coming years. Exchange traded funds (ETFs) offer investors easy access to the Chinese growth story, but navigating the country’s equity market is not straightforward.
This is the last write-up on the tactical asset allocator portfolio, which has been running since 2013. The investment brief was to be cautious and diversified across asset classes, using exchange traded funds wherever possible, and to avoid being down across all holdings at any one time.
While the portfolio has only doubled in size over the five years since its inception, it has never been down by more than a few percent month on month, although the publication-date constraints of having to deal on one set day per month has limited its agility.
China has not sought to project power beyond its immediate neighbours since the pre-colonial period, but this changed in 2013, when President Xi Jinping launched the “One Belt One Road” (BRI) initiative, intended to be the largest infrastructure project of modern times, in a bid to regain Asian hegemony.
The S&P 500 index has risen by about 80% over the past decade, but stockmarkets in the rest of the developed world remain 25% below their levels before the financial crisis. Some 15% of that decline has occurred since the peak in January last year. This bifurcation is odd, since the only real economic growth has been generated by emerging powerhouses such as China, whose GDP has grown by nearly 250% over the past decade.
The rally in the first quarter lifted the US and other markets to a six-month high, while sovereign bond prices have mirrored investors’ renewed confidence by tumbling from their recent two-year peak. The uber-pessimism of the fourth quarter of 2018 has turned into fresh hope that gains can be made when trade wars and Brexit have been pushed out of the way.
One of the reasons 2018 turned out to be such a disappointment for equity investors was the underwhelming performance of the Chinese economy, the ramifications of which were felt as far afield as Germany.
While most equity markets had a rough year, the performance of emerging markets and eurozone stocks were among the worst. So for 2019, some of the most important questions facing investors are what caused the slowdown in China last year and when the economy is likely to bounce back.
The Chinese market has got off to a roaring start this year. As the chart below shows, the Shenzen Composite index has a year-to-date return of 33.6%, making it the best performing index in the world. Meanwhile, the second most successful index is its rival, the Shanghai Composite, up 24.1% this year.
Rising debt levels “could trigger a systemically damaging downturn”, a report from credit rating agency S&P Global has warned.
The economist Paul Samuelson once joked that the stockmarket has predicted nine of the past seven recessions. But while the over-reactive nature of equity market investors and their poor predictive powers ring true, there is nonetheless a clear link between economic and market performance, at least in advanced economies.