China as a Touchstone

Michael Rudd, CFA | President, CEO and Portfolio Manager

Last week, we wrote that we believed trading volatility had settled down. Indeed, we noted on Friday that “from the perspective of our trade desk, markets are beginning to function more normally”. Two days later (on Tuesday!) the Dow Jones was up over 4% at the open and ultimately closed down on the day, an intraday swing that has only happened once since 1925 (during the GFR in Oct. 2008). This demonstrates how hard it is to make predictions about short-term market behavior and why we continually reiterate to clients and readers that it is so important to focus on investment process, rather than the “daily torrential noise” from the media that flows to investors and the general public.

We saw some encouraging events in China this week that started a debate in our now “Daily Desk Calls”. First was video of Wuhan “opening up” and letting people leave the city for the first time in 76 days. The second was a near 100% re-opening rate of essential business at the direction of the Chinese government. The debating point is that while industry seems to be restarting, demand and consumption remains slow to come back (retail sales, traffic and power consumption are all approximately 15-25% below last year’s numbers). It seems that the average person is unable to, or is less interested in, returning to previously normal consumption activity (i.e. discretionary shopping, travelling and purchases). This, to me, is completely rational behavior after such a traumatic event, and I wonder how long it will sustain. I also wonder how it will translate into other parts of the world that are now experiencing the peak of what Wuhan went through 2 months ago.

  • Figure 1 presents US consumer confidence data, which has reached a major low, and is only just starting (our opinion). The consumer is 67% the US economy, while in China it is just 39%. Indeed, confidence in the US “getting back to normal” is critical to our collective economies.

“This means that” the data that we have highlighted above, with respect to China, is a warning to the rest of the world. While there is rightly fair criticism, in our opinion, for how China managed its initial reaction to the infection at the start of its outbreak, it certainly did an amazing job afterward with mitigation management.  If China, with a centrally planned economy and good mitigation management, is struggling to restart, how will the Western world’s economies react? Unfortunately, we fear the illness will last longer here and our economies will be slower to recover, thus prolonging the impact.  We expect more financial market volatility.

 


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