China will be the first to sail out of the Global Storm…
Global Macro Strategist, Saxo Bank Group
Summary: The paradox here is that from Q2 China's growth is likely to accelerate as the rest of the world decelerates.
As we go to press, the only thing that I have complete conviction on is a lack of conviction in the near term.
We are in the midst of the epitome of a bear market in equities. A lot of the price moves we are seeing across asset classes are clear signs of distress and the fight for liquidity over anything fundamental or rational. Fear, plus the fear of fear, reign supreme. That the VIX is over 80 — some seven times higher than mid-January, with a 12 handle – is a testament to that.
There is blood on the street and positions are being slaughtered: the S&P is down 25% year to date. However, one has to take a step back and remember that this is what happens after you have the longest bull market run in history. The S&P climbed around 400% from its 2009 lows to its all-time high of around 3390. Other names such as Amazon are still up over 1200%, despite a 20% pullback from its recent all-time high.
As always, context is everything. This too shall pass, life will continue and eventually uncertainty — and fear — will peter away. After more education and curbing measures, time decay on virus concerns will set in. As the rest of the world catches up with what Asia went through in January and February, fears will generally lessen.
We need a resetting of expectations around fundamentals and earnings as policymakers deal with the challenge of the triple threats: a demand shock, a supply shock and the destruction of capital in the energy market (where once again Putin demonstrated that he is the undisputed Grandmaster of all chess moves).
The point to keep in mind is not about the validity of the rising numbers of virus cases in the US and Europe. Instead it is direction and the fact that Asia (especially China, Hong Kong and Singapore) has a lot of historical experience, expertise, resources and procedures for dealing with outbreaks – especially given the epicentres of SARS ten years ago. Europe and the US just don’t have that. What we will see in the next few weeks is the exceptional job China, Singapore & Hong Kong have done of containment. The numbers in Europe and the US are likely to get dramatically higher over the next four to eight weeks.
However, with the Northern Hemisphere summer coming in, time is on their side. That, plus a potential breakthrough toward a vaccine. These are potential advantages that Asia did not initially have.
While China has lead the world in regards to the economic slowdown that we are in the midst of – talks suggest Q1 China GDP could be in the -10% to -20% range – we are also likely going to be entering a quarter or two where that slowdown ripples across the eurozone and the US.
So the paradox here is that from Q2 China’s growth is likely to accelerate as the rest of the world decelerates. For those who will rightly flag that the US and eurozone will have lower demand for Chinese goods, don’t forget Asia’s demographics and secular consumer spending, healthcare, biotech and infrastructure themes. China does about 50% of its trade with Asia.
Most of Asia benefits more from rising growth in China than rising growth in the US or eurozone. Also bear in mind that China will be coming from the lowest of bases: zero. Construction companies, real estate and infrastructure-linked players should be the first place for investors to look. With an eventual return to the service economy – restaurant chains are once again opening across the country – some provinces are claiming to be almost back to 100% normal.
The higher beta names that face China are obviously Singapore, South Korea and Taiwan. They are still not yet showing signs of economic traction upward, but are worth monitoring closely for a follow through of Chinese activity later this quarter.
Blue-chip, high-dividend and solid balance sheet names are worth looking into. In a world with ever structurally lower yields (the Fed has now cut rates by 150 basis points in March alone), names like CK Hutchison (1 HK) are yielding close to 6% unlevered. Alternatively, Altria (MO, old Philip Morris) are yielding around 9% unlevered — and that’s with respective -30% & -23% YTD pullbacks respectively.
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