A shadow of suspicion has been cast over China while nobody seems quite sure which direction monetary policy should be heading.
This year a lot of big names were absent from the World Economic Forum, hosted in the Swiss ski resort of Davos. With the US government in shutdown, president Donald Trump declined to attend, while other key world leaders from Theresa May to India’s Narendra Modi stayed at home.
However, from those who did attend, are there any lessons investors can draw?
Perceptions of China appear to be shifting
Whereas two years ago president Xi Jinping received a warm welcome for his defence of globalisation at Davos (with some casting the Chinese leader as the defender of the international liberal order), the mood towards the country appears to have cooled this year.
In 2018, perhaps on the back of the US’s trade war, there has been an increased suspicion of China among western governments. This can be seen in the growth in scrutiny of Chinese investment and concern over security risk of allowing Chinese telecoms firm Huawei to build the nation’s 5G networks.
This change in views was perhaps best articulated by former hedge fund manager George Soros speaking at the event: “Last year I still believed that China ought to be more deeply embedded in the institutions of global governance, but since then Xi Jinping’s behaviour has changed my opinion.”
He continued: “My present view is that instead of waging a trade war with practically the whole world, the US should focus on China. Instead of letting [the Chinese tech companies] ZTE and Huawei off lightly, it needs to crack down on them.
“If these companies came to dominate the 5G market, they would present an unacceptable security risk for the rest of the world.”
What does all this mean for investors? If discord between China and the US and its allies continues, Chinese companies may suffer. Whether valid or not, Chinese companies are likely to come under further suspicion from Western governments, with implications for their market valuations. For example, Chinese surveillance equipment company Hikvision saw major damage to its share price in 2018, following a ban by the US on the use of its equipment.
Hostility between China and the west could also open up another risk: market access for western consumer brands, many of which have become increasingly reliant upon Chinese consumers, particularly European luxury fashion companies.
There is no clear reason to think that such companies face losing access to the Chinese market anytime soon. However, as China’s decision to cut off package tourism to punish South Korea in 2017 shows, the country is not averse to leveraging its citizen’s growing spending power.
However, the growing suspicion of China was not shared by all at Davos. Two attendees, speaking anonymously to Axios, an American news website, noted that many of the event’s guests still held positive views on the country. According to one: "Every panel has one or two Chinese people, speaking perfect English. They used to linger in the back. Now they are setting the agenda." Another noted that a lot of sympathy exists for China among attendees "because they don't understand the Chinese model".
Big Tech still in politician’s cross hairs
What also become apparent over the week was that policymakers round the world are still concerned about the power of technology companies. And, unsurprisingly, Davos attendees agreed on the need for international regulation.
German chancellor Angela Merkel called for news international rules on data use, while Chinese vice president Wang Qishan urged “coordination.” Meanwhile, Japanese prime minster Shinzo Abe noted that the next G20 meeting, to be hosted in Osaka, would focus on international data rules. “I would like Osaka G20 to be long remembered as the summit that started worldwide data governance,” he said.
Financial commentators have been warnings for over a year now about the potential regulatory risk to tech. That risk helped to sink Facebook shares in 2018. The rest of the FAANGs and other large tech companies (outside of China) have so far been less affected. However, with valuations for many tech companies (despite the recent sell-off) relatively high, their share prices could prove vulnerable to any new bad news.
Monetary policy direction unclear
Another takeaway from the Davos was that no one is quite sure whether or not now is the time to starting winding up the era of lose monetary policy. Just as Fed chair Jerome Powell seems to swing from dovish to hawkish (or perhaps, more accurately, the market’s perception of him), the Davos set seemed divided on how monetary policy should proceed.
Everyone fears that continued tightening will hurt the already slowing global economy and by extension financial markets while at the same time worrying that a failure to tighten up will leave central banks with inadequate firepower when the already slowing global economy takes a turn.
For example, hedge fund manager Ray Dalio spoke of the Fed’s “inappropriate desire” to tighten monetary policy. Similarly, Philipp Hildebrand, vice chairman of BlackRock, warned of the Fed making a “policy mistake,” meaning tightening too fast and too soon and choking off economic growth.
However, at the same time, Hildebrand noted: “What worries me most is if we were to run into a serious problem, a recession or something worse, we would have very limited firepower left to respond to it.”