Investors worldwide are becoming increasingly wary of China’s economic status, going beyond official statistics. Numerous unofficial metrics hint at emerging problems, leading to a ripple effect on global assets tied to China’s economic performance.
This increasing scepticism has resulted in a downturn in stock markets from London to Bangkok. Moreover, it’s impacting related areas such as the Australian dollar, New Zealand dairy costs, and stocks from prestigious companies like LVMH to mining conglomerate BHP and entertainment giant Las Vegas Sands.
The post-pandemic era was expected to bring a consistent recovery in consumer expenditure and rejuvenate the stagnant property market in China. However, the anticipated boom is turning out to be elusive. Most economic pundits are sceptical about China achieving its 5% growth aim this year.
Sat Duhra from Janus Henderson, who specializes in devising macroeconomic scores for nations, expressed concern. By analyzing seven crucial factors such as PMI surveys, real exchange rates, and liquidity, he concluded, “It’s a challenging scenario.” He further elaborated, “PMIs are dwindling, and GDP predictions are being recalibrated downwards. Under such circumstances, being optimistic about China’s economy doesn’t seem logical.”
While his fund is vested in the Chinese market, he’s consciously steering clear of sectors susceptible to economic fluctuations, such as banking, real estate, and industrial sectors.
China’s economic health has global implications, given its stature as a significant trading ally for several neighbouring nations and other global economies. Signs of diminishing demand are becoming more apparent.
New Zealand’s dairy behemoth, Fonterra, has twice revised its milk price forecasts, attributing the decision to “diminished demand from primary importing zones.” They’ve also highlighted that China’s slowdown has been the most noticeable.
Furthermore, BHP Group recently reported its lowest annual profit in the past three years. In tandem, South32 observed a nearly 66% drop in its profits, while New Zealand’s a2 Milk Co raised concerns about a sluggish growth rate in China’s infant formula segment. Consequently, the share prices of these companies have taken a hit.
Seema Shah, from Principal Global Investors in London, emphasized that Europe, too, is feeling the pressure. The economic fate of German manufacturers, for instance, is intricately linked with their Chinese clientele. “Our outlook on Europe has turned somber,” Shah confessed, underscoring that the US stock market might also face risks due to China’s economic turbulence.
Investors had earlier anticipated companies like BHP and currencies like the Australian dollar and Thai baht to surge post-pandemic, banking on China’s swift economic revival. However, these expectations seem to have been premature. For instance, the influx of Chinese tourists to Thailand – a primary travel destination – is currently just a third of the pre-COVID levels. Additionally, Thai stocks have seen a drop of 6.5%, surpassed in Asia only by Hong Kong’s Hang Seng.
Portfolio manager Zuhair Khan, based in Japan, mentioned avoiding or short-selling stocks of companies primarily dependent on Chinese sales. He highlighted significant concerns like declining consumer and producer prices and escalating youth unemployment rates, suggesting the need for immediate, robust policy interventions.
While there’s been a recent pullback, shares of companies like Las Vegas Sands and LVMH have seen an annual rise of 11% and 16% respectively. This is in comparison to a 10% rise in global stocks. Some investors are maintaining a positive stance.
Prashant Bhayani of BNP Paribas Wealth Management voiced optimism, expecting group travel to regain momentum by the end of 2023. He believes this will bolster Chinese expenditure on global luxury goods. However, the overarching sentiment seems to be one of caution, with investors awaiting a recalibration in valuations to mirror more grounded assumptions.
Jagdeep Ghuman from U.S. asset manager Nuveen remarked, “While the theme of China reopening had initially gained traction, it hasn’t lived up to the hype.” He further noted that investment decisions are now more “case by case,” primarily driven by valuations.
In summary, China’s economic trajectory has thrown a spanner in the works for global investors. Amidst the prevailing uncertainties, recalibrating expectations and strategies seems to be the order of the day.
Read More: