The Great Reset: China Slumps, America Rises
Are you confused by all the noise that emanates from the investment world? I suggest you follow my four rules: Tune out social media message boards; ignore the partisan hacks on financial television; learn to recognize political and corporate propaganda; and stick to the hard data.
Case in point: During this presidential election year, when you hear certain “populists” bleat about how America is in decline and foreign competitors like China are taking advantage of our weakness, don’t believe it.
Let’s examine China’s latest woes, which loom large, of course, because the country is the world’s second-largest economy. A lot of average Americans would be shocked to learn that the big bad boogeyman China has been losing ground to the United States.
Recent efforts to shore up China smack of desperation. Chinese stocks have rallied this week, with the Shanghai Composite rebounding after a prolonged slump, following reports that a Chinese sovereign fund would make big purchases of exchange-traded funds (ETFs) linked to Chinese stocks in an attempt to reassure financial markets.
This move follows additional measures taken by Beijing policymakers so far this year, such as lowering the reserve requirements for China’s banks and tightening restrictions on short sales.
Regardless, the Shanghai Composite is still down about 6% year-to-date and about 14% over the past 12 months, compared to the S&P 500’s gain over the past 12 months of about 20%.
Decelerating economic growth, a real estate crisis, a huge national debt, a shrinking and aging population, and massive youth unemployment are dampening investor sentiment in China.
The increasingly autocratic nature of President Xi Jinping’s regime is exacerbating China’s economic uncertainty. It’s not just political dissidents who are getting pressured by China’s police state.
China has been cracking down on private enterprise, including the tech sector and well-known entrepreneurs. The government has even started to prosecute analysts who simply report the truth about China’s sputtering economy, accusing them of defaming the country’s leaders.
The country’s economic growth is clearly on a downward slope (see chart).
Moody’s Investors Service recently slashed its outlook for eight Chinese banks from stable to negative. Fears of financial contagion are coming to the fore.
A week ago, a Hong Kong court ordered the bankrupt property developer Evergrande to liquidate. Evergrande is the most indebted real estate company in the world, with debts of more than $300 billion (that figure isn’t a typo). Real estate accounts for about 20% of China’s economic activity.
China’s slackening domestic demand is affecting the sales and profits of U.S.-based companies. Apple (NSDQ: AAPL) exemplifies this dilemma. In its latest quarterly operating results, released February 1, Apple beat on the top and bottom lines. However, Apple reported a nearly 13% year-over-year drop in revenue from its Greater China region in the December quarter.
That said, results so far this earnings season for the S&P 500 have been generally better-than-expected, which is helping to keep the stock market rally alive. The main U.S stock market indices closed mostly higher last Wednesday as follows:
- DJIA: +0.40%
- S&P 500: +0.82%
- NASDAQ: +0.95%
- Russell 2000: -0.17%
The benchmark 10-year U.S. Treasury yield (TNX) edged higher by 0.49% to reach 4.1%, reflecting greater realism about the timing of the Federal Reserve’s next interest rate cut. But in a positive move, the CBOE Volatility Index (VIX) fell 1.76% to sit at about 12.8.
Remember all of that chatter about “The Chinese Century”? It’s already over.
In China, the state retains an iron grip on domestic interest, exchange rates, and capital outflows. Consequently, citizens receive little accrual or benefit from their high rates of savings. Instead, this money is channeled by the state into industries that are favored by bureaucrats, including many that are state-owned.
Bureaucrats tend to make poor business decisions, hence the rise in China of “zombie corporations” and see-through office buildings. As top-down decision-making channels more and more investment into favored industries, average returns on investment fall.
Yet, despite these headwinds from China, the global economy is forecast to generate healthy growth this year.
According to the latest data from the International Monetary Fund (IMF), published on February 7, global growth is projected to stay at 3.1% in 2024 and rise to 3.2% in 2025.
In the IMF’s category of “advanced economies,” the U.S. is number one in growth, at 2.5% for 2023, 2.1% for 2024, and 1.7% for 2025. The above chart shows higher growth rates for the emerging market of China during those years, but they still represent a huge comedown from the country’s halcyon days.
In addition, a seismic shift is underway in emerging market investing, whereby global investors are pulling billions of dollars from China and diverting it to India.
Sectors to Watch in 2024
As I told you, stick to the hard data. Despite geopolitical risks and China’s stumbles, the bull market narrative is still in place.
Among the most promising growth sectors for 2024 are technology, health care, and industrials. The tech sector will continue to reap gains from the boom in artificial intelligence. Health care is forecast to experience a jump in demand this year, and industrials should benefit from accelerating economic growth.
For income, among the sectors positioned to shine are utilities and real estate investment trusts (REITs), as interest rates fall and borrowing becomes cheaper. What’s more, falling bond yields make dividend-paying stocks more attractive.
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John Persinos is the editorial director of Investing Daily.
This article previously appeared on Investing Daily.