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.
Stockmarkets surged at the start of the year as they bounced back from their December lows. Progress through February has been volatile, but the upward trend continues, despite major macro concerns.
The Bric group of countries (Brazil, Russia, India and China) captured investors’ imagination back in 2001 when Goldman Sachs’ chief economist at the time, Jim O’Neill, coined the term. This new investment theme spawned a raft of fund launches, and investors piled in. Then in 2010 South Africa joined the group to turn Bric into Brics.
There were signs in the last quarter of 2018 that the growth/technology stocks that had led the bull market were flagging. However, market momentum remains strong, and global consumer brand companies such as Unilever and Diageo are still loved.
The Chinese bear market in shares has lasted since the peaks reached in the summer of 2015.
The index of share prices for the Shanghai market has halved since June 2015. Then, excessive exuberance tempted many domestic buyers into the stock market. A substantial credit expansion allowed people to buy shares on borrowed money.
It would be easy to imagine that the US/China trade war and the US Federal Reserve’s resolve to tighten monetary policy, which have been the two big fears hanging over the US stock market throughout 2018, are reaching some sort of stasis. The market certainly rejoiced when Fed chairman Jay Powell made the dovish comment that interest rates are “just below” the range of rates considered neutral. The Dow Jones Industrial Average index shot up by 600 points in one session, its best single-day gain since March.