What should investors know about China?

Personal Investments

11 November 2020

With the US election and COVID-19 continuing to dominate headlines, investors could be forgiven for overlooking developments in China. We don’t think they should.

Investors’ focus has in recent months shifted away from the world’s second largest economy, China. But we believe China has demonstrated impressive resilience – both in its near wiping-out of the coronavirus and, more broadly, in its handling of the economy.  Here’s how:

Handling of the coronavirus

China’s rapid response to the coronavirus was instrumental in stopping its spread. Wuhan, the epicentre of the virus, was placed into strict lockdown, with sophisticated technology used to monitor everyday movements. A willingness to wear face masks early on, coupled with the experience of living with a previous pandemic (the respiratory virus, SARS) also appears to have stemmed the spread.

Health of the economy

The relatively fast recovery from the coronavirus has been crucial in restoring the health of the Chinse economy. (Investors should note that a healthy economy generally makes for a healthy stock market).

Growth in output for the period June to September 2020 exceeded that of the same period in 2019[1], which should result in growth for the whole of 2020 coming in at around 2%, in our view. This would make China one of the few economies to expand this year. This is in marked contrast to European countries where, despite a recovery from the worst of the crisis in March, economic output has yet to exceed that of its pre-pandemic levels.

Role in the world post-Trump

China’s relationship with world leaders is important for investors. For much of President Donald Trump’s time in office, we saw how escalating tensions between the two superpowers had negative impacts on global stock markets. By contrast, Joe Biden, in his role as Vice President under the Obama administration, was seen as being conciliatory towards China.

But make no mistake, President-elect Joe Biden and his Democratic party are unlikely to be a softer alternative to Trump’s policies on China. We don’t think US-Sino tensions will ease much after the US election. Mainstream opinion in both the US and China has hardened, and the standoff between the two nations has left long-term scars on global trade, in our view.

We believe this could easily lead to a new cold war between the two rivals, creating an increasingly divided world and a race to get ahead in the technology and defence industries.

Back to the here and now, and the hope is that with a vaccine breakthrough on the horizon, the world may be able to start to return to some sort of normality in the months ahead. But while European economies remain battered by the global pandemic, let’s not forget that renewed demand for goods from China is helping to increase the strength of the global economy overall. The latest statistics show that China has been an important factor in the recovery of new manufacturing orders, particularly in Germany and Italy.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

 

[1] Source: Bloomberg as at 18 October 2020.

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