China-US switch trick
At the end of January this year, the IMF forecast that the Chinese economy would grow by 8.1% this year and the US economy by 5.1%. Six weeks later and it seems that China and the US have swapped places in terms of growth rates for 2021. This has major implications for investors. My previous column ‘Trade-in China shares for bonds’ three weeks ago happened to coincide with the peak in the CSI 300 index. At the time, it was up 11 percent since the turn of the year but has since fallen 14 percent. The nice thing is that long-term interest rates in China fell in the same period, which was different outside China.
The reason for becoming more cautious with Chinese equities was mainly the relative economic development. The peak of economic growth in China lies in the first quarter, which means that the positive growth surprises in the course of this year can mainly be found outside China. Last Friday, Premier Li Keqiang presented the 14th five-year plan including a Vision 2035. For the first time in forty years, no growth target has been set for the next five years in that five-year plan. For a planned economy, that is extraordinary. Jokes are often made about the speed with which China published its GDP figures, but that does not mean they were inaccurate. Local administrators were counted on to meet growth targets and pockets were always deep enough to do so. China has wanted debt to be more in line with the growth of its economy for some time and that limits the scope for stimulus. Good news for bondholders, but in the short term less good news for shareholders. Instead of a growth target for the next five years, there is only a growth forecast for the coming year. Li Keqiang expects economic growth of 6 percent this year. This is considerably lower than the recent 8.1 percent forecast by the IMF. China’s economic growth may even fall below 6 percent, strangely enough especially if the US economy grows strongly. That is because Biden can then afford to be relatively tough on China. Next week, the new Democratic team will meet for the first time with a delegation of the Chinese foreign minister in Alaska. That meeting will set the tone for relations with China under Biden. The new American president seems to go even further than Trump with regard to China. Biden calls the oppression of the Uighurs in Xinjiang a genocide and tries to provoke China on Taiwan.
Growth forecasts for the US economy have been constantly revised upwards in recent weeks. First came the news that the US wanted everyone to be vaccinated on Independence Day (4 July). Shortly afterward, this was brought forward to the end of May. This means that the US economy will open much earlier, which is good for economic growth. In addition, last weekend the American Senate approved the America Rescue Plan with a minimal majority of 50 Democrats. This $1.9 trillion stimulus package – larger than the entire Canadian economy – is also coming faster than expected. It seems a little strange to start stimulating just before the economy opens and employment is already picking up, but America’s unemployed will receive $300 a week in federal money through September. For three-quarters of the unemployed, this means that they will earn more than when they still had a job. In addition, every American will receive 1400 dollars (on top of the 1200 dollars at the beginning of last year and the 600 dollars at the end of last year), which will go partly into the consumer savings pot, which has now grown by 2.1 trillion. Normally, American consumers spend what comes in and surveys show that there is enough pent-up demand in the pipeline. Morgan Stanley dares to forecast economic growth of 8.1 percent this year, which happens to be the same rate that the IMF originally had for China. Things can change. Such developments in growth forecasts do not leave the US dollar unaffected, and it rose in tandem with US interest rates. Incidentally, such corrections in the bond market typically do not last longer than three months. The market now seems to expect too much inflation for this year, but probably too little for 2022 and beyond. Thanks to economic growth, it will also be a good year for corporate profits, which will also be revised upwards. The combination of good corporate earnings, free money from central banks and the government, and still significantly positive risk premiums on equities, put a firm floor in the equity market. Any excesses have been partly corrected (Tesla is now 25 percent below its peak) and sentiment has returned to neutral. Spring is just around the corner for the US equity market.