What explains this kind of a staggering move across the Chinese markets? Just when the world is turning away from Beijing when it comes to the manufacturing hub, one wonders what is adding to the excitement across Chinese stocks?
I am extremely concerned about that because Hong Kong market is doing extremely well and it is doing extremely well because the Chinese components of the Hang Seng Index are going up and it has nothing to do with Hong Kong. I have very little faith in this kind of bull market at a time when the World Health Organisation announced the single worst ever day in terms of infections. It is not going to go away. The fact that China is under control and Hong Kong is under control does not mean that the risk of the world is under control and it is reaping into the United States and the Shanghai Index is up 6% because the government put some nice news in the market. There is really very little to back it up.
What explains this because China is now a standalone case. Be it the US markets or the Indian markets, we have recovered from the March lows. It is a global rally led by liquidity which is taking place. Does that perhaps best explain why China as well is moving up?
China is up 6%. There have been extremely bullish state announcements. The bull market is a good thing and you should be supported and immediately you had all the retail buyers not institutional coming in. Now Chinese market can easily be driven by retail sales because they can easily account for up to 40% on any day’s turnover. People of course are fed up with hearing bad news and if the state that can influence the market comes up and says it is a good thing to buy, they buy it. I am afraid this is not on the basis of fundamentals. You do not buy the stock market because you expect it is going to go up. You buy because you expect profitability is going to increase. You expect the macroeconomic data to improve and you expect that the unemployment is going to fall.
In the case of the United States or the European Union, the economies are doing absolutely dreadfully. They are doing very poorly. So if China decides to go on its own, good luck to them. I am simply looking very coldly here. This is business and it has nothing to do with politics and it has nothing to do with geography. If somebody points to me towards that market, it is going up because there have been bullish announcements. I would like to know what they are buying it for, what is the backing of that. Hong Kong market is doing incredibly well but their economy is doing dreadfully and it is going to do insignificantly worse. The market is up because it is driven by Chinese components of the Hang Seng Index but it has nothing to do with Hong Kong.
But put into context for us the leverage at the moment. Some reports suggest that it is actually about half of what it was at the peak of 2015 and the central bank actually withdrew liquidity from the financial system. But on the other hand there is still anticipation of further easing in China itself. Is it something to worry about?
This government took to supporting its economy at that time as the lockdown did blow it sideways. It shrunk by 6% during the first quarter. In the case of the United States, in the case of the UK, in the case of France, money was given to unemployed workers. I am not sure if it was the case in China. Money has been spent or has been promised to be spent primarily on infrastructure projects. In other words, the government said we do not care how big the fiscal deficit is, we are going to spend a lot more money particularly as they have a series of 165 projects; primarily most of them investment in technology, in artificial intelligence in telecommunications and in pure infrastructure and they will spend this money. But the fact is it will take six months if not years to drive though. So it is good news in a sense that they are not doing anything.
The same is the case with the People’s Bank of China. It has increased liquidity in the market starting from January. It has cut interest rates but no more than that. There has not been the kind of an injection in the economies we have seen in the case of the United States and the European Union precisely because the Chinese economy did not ache and did not get hurt as much as these G3 economies were. So there is no new news to say they are just injecting Renminbi in the market and therefore this is going to drive it up. They have done it and they are ready to do what they said they are going to do: measured but effective but not something that is going to sell off. It’s not like you get up on Monday and certainly Tuesday you’ll be in paradise. It will take several months before this percolates through.
In terms of foreign investor interest, do you see it waning or do you see that only building up as they look towards emerging markets? Would China still be the first option for them before we even get to the other emerging markets? I just want to understand what the perception would be given that the mood otherwise and politically is a little China-averse at the moment?
China right now is going through a bad publicity period because of their national security and safety implementation of the law that has taken place in Hong Kong. The fact that President Trump insists it is the Chinese that caused the coronavirus. There is no real resolution of the trade war with China and on the contrary, the United States carries on implementing measures that divorce Chinese investment from the United States. The divorce United States investment from China and of course, the European Union has also joined in as well and it has taken measures that tends to push Chinese money, Chinese investment and Chinese trade away. So China is not receiving good publicity right now.
Whether one thinks it is good or bad or justified or not is really irrelevant because that is what is actually happening. I would not say that foreign investors are particularly interested in China right now in view of what particularly the United States has been quietly implementing. Nothing that the United States has done or said so far is new. In other words, all the things concerning investment of Chinese companies in China, the delisting of Chinese companies in the United States stock exchange, the possibility of further implementation of the tariff ward; it is not yet on the table but quite potentially all these are not bullish news for investors in equities in China.
How you are looking at the overall mood for equity markets across the globe in terms of that V-shaped recovery that everyone is talking about? Day after day the numbers that are coming in with cases across the globe are only rising. Does this in turn dent hopes for a strong V-shaped recovery in the global economy?
No, it does not. It means that the G3 economies — Japan, European Union and the United States — are going to have more lousy news till the end of the year. The recovery when it will start taking place will be slow and measured and what I am telling my clients when I come to look at equities is I am looking like a hawk on the labour market. I want to see the 20 million additional unemployed in the United States disappear quickly before I get bullish. The numbers you see every now and then; they just created two more million workplaces in the United States last month; one has to net out the fact that these might very well have been jobs that were lost because of the lockdown and they were simply gained. They are not new jobs.
The same thing goes in the European Union where they are planning to extend the subsidy of wages well into Christmas and beyond because clearly the labour market is not returning. If the labour market does not return back to “normal,” neither will the economy. Therefore, for the three major economies and for the rest of their minor and minor-major economies in the European Union, they are not good news. Same thing goes for Japan. On top of this, we now have the uncertainty of the elections in the United States. Will Trump be elected or not? This of course, might be good news for some parts of the market but it might be very bad news for other parts of the market. Before it was taken absolutely for sure that Trump was going to be re-elected. Now there are overwhelming doubts if he will be elected at all. Now he is likely to lose the election. All these are not bullish items for the equity markets.