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Macro Minutes: Current Developments in Chinese Markets

Some investors worry that a US legislative process known as reconciliation might threaten the potential market-calming effects of political gridlock by allowing new tax and spending bills to pass Congress with only a simple majority of votes. In his latest video, Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher explains why the Congressional reconciliation process isn’t likely to completely bypass political gridlock.




Video title screen appears, "Macro Minutes: Current Developments in Chinese Markets" Face Cam on the bottom right showing a man wearing a suit

Austin Frazer: Hello, My name is Austin Fraser. I'm a portfolio engineer and capital markets analyst here at Fisher Investments and today I'm going to talk about current developments in Chinese markets.

Screen shows two line charts of Economic fundamentals healthy and recovery provides path for rest of world. Both charts starting from 2016 to 2021. First one on the right showing the exports, the left chart shows Retail sales.

Austin Frazer: I'm going to start with some comments about the state of the Chinese economy. China is what we call first in, first out, meaning it was the country to first experience the virus outbreak, the country to first gain containment of that virus and then the first to emerge from that, and the economic recovery has really been twofold.

Austin Frazer: First, it started out with something more driven by external demand, so exports, and you can see the chart there to the left that was due to stimulus in the developed world, both monetary and fiscal driving demand for Chinese goods. More recently it's been domestic consumption and services that has begun to catch up to the previous external demand and trade.

Austin Frazer: You can see a chart of retail sales on the right and you can see the rapid recovery in the most recent months here. There's really two major takeaways I want you to have from this slide, which is that we expect growth to return to the pre COVID trend line that the year over year numbers that you see on this chart and in the news are very temporary in nature due to the low base of the crisis back in March of 2020.

Austin Frazer: The second part is that we expect this to be a rough outline for the rest of the world, that the US is probably more towards the middle of its recovery and maybe Europe and Japan maybe towards the beginning part of that.

Screen shows two line charts for Chinese policy likely to normalize, with global implications. Both charts starting from 2014 to 2021. First one on the right showing China total social financing growth set to moderate. the left chart shows China credit impulse points to decelerating credit.

Austin Frazer: Because recovery is further along in China. there have recently been some fears about tightening of policy, either monetary or fiscal policy. And while some of that is to be expected, given where the economy is, we see that as more of a normalization rather than a significant tightening of economic fundamentals.

Austin Frazer: And the primary mechanism which the government is doing that is through credit growth, which you can see a chart on the left hand side there for total social financing growth. China had been on a previous multi year trend of deleveraging to address some financial risks and debt levels. And then COVID came along and the government had to stimulate the economy. And so you can see that credit growth reversed that trend and increased for the period of 2020.

Austin Frazer: And ultimately, however, now it's beginning to decelerate as again, the Chinese economy really doesn't need the additional stimulus to continue to operate. And you can see that also in another way onto the right side for something called the credit impulse, which essentially measures the growth rate of new credit as a percent of total GDP. So if you combine these two charts, you see really the idea being that you have moderating economic growth, although we think it's still going to ultimately remain healthy, slowing credit growth.

Austin Frazer: And those both tell us that the current expectations of global economic reacceleration, which has been very much played about in the news of late, is likely overgrown. And that is one reason why we think that the recent cyclical and value led rally in shares across the globe is likely temporary in nature and that growth stocks will resume leadership moving forward.

Screen shows two line charts for A Near-Term headwind but likely don’t affect future leadership. First one on the right showing Alibaba price history starting from 2019 to 2021. the left chart shows Google price history starting from 2017 to 2021.

Austin Frazer: One other piece of news that's made headlines recently has been fears of a regulatory response to China's technology and financial technology industries and that ultimately culminated with the recent $2.8 billion fine on Alibaba for antitrust violations. And the government also made sure that tech groups would comply to many of these rules or face severe punishment.

Austin Frazer: Now that sounds very ominous, but in our view some of the regulation is to be expected. China's technology and financial technology or fintech industry is very much in the earlier stages of development relative to global peers. And so we would expect that as they continue to grow, additional oversight by government agencies would be a necessary requirement, much like in the rest of the world, in developed world in particular.

Austin Frazer: More importantly, the examples that we've seen in the developed world in history suggest that these types of events have a very limited impact on the long term performance of share prices. And so one example that we have here is looking at Google, which is the chart on the right there. You can see its price history and the fine from the European Union back in 2018.

Austin Frazer: That fine was roughly equivalent on a percentage sale basis to where Alibaba's fine rates most recently in the last few weeks. And so much to that we would expect, as you can see, that Google didn't react to that over long periods of time, that there's probably bigger drivers at work. We expect a similar sort of thing with Alibaba.

Austin Frazer: Now, some people also forget that the government involvement is not all negative. The government has been very supportive for many of these companies, Alibaba included It's limited competition in its very early stages and ultimately wants to create global champions. And so we see this more as a normalization towards those global standards rather than the views of an overzealous regulator.

Screen shows a two-lines chart for China’s market is tilted toward growth, a preferred category. The chart has one dark blue line and one light blue line at the bottom 0% up to 80%. Starting from 2010 to 2021.

Austin Frazer: So putting this all together, we see a positive backdrop for global equities and Chinese equities. And we expect that to be led by growth categories where we see strong underlying fundamentals and ultimately economic growth that likely moderates back to that precovid path.

Austin Frazer: Most people may not appreciate that China's market at this stage is very much tilted towards growth. Historically it's been very much commodities and cyclically based, as you can see in this chart here, which measures things that we call old economy sectors like financials, energy and industrials and then new economy sectors like discretionary healthcare and technology.

Austin Frazer: And you can see the makeup of markets has changed quite dramatically that in the last several years the newer economy stocks or the growth categories have taken up a substantially much larger portion of the MSCI China Index.

Austin Frazer: Currently, portfolios are underweight to China, but that's just a makeup of the structure of the market itself, meaning we have no exposure to some banks and cyclical industries and are very much still bullish and overweight to the growth categories like discretionary technology and other consumption based plays.

A message appears on the screen: “Thank you for watching! If you would like to learn more about our views, please reach out to your relationship manager or email” and a man using face Cam at the bottom right

Austin Frazer: And that concludes my remarks. Thank you so much for watching. If you would like to learn more about our views, please reach out to your relationship manager

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