The stock rally in Chinese markets continues to gain momentum. China A50, the blue-chip index of the Shanghai Stock Exchange has soared 5.7% since the beginning of the day after growing 8% last week. These are the highest levels for China A50 since March 2008, and it clearly shows the change in the disposition of investors who suddenly fell in love with Asia. The growth of the Chinese market is also pulling the Nikkkei225, which is up 2% this morning, although it ignored the Chinese market rally in the previous two weeks. Futures on American indices are also rising. Nasdaq once again updates records, ascending to 10500. The S&P500 and Dow Jones are also showing growth, but this is a pale shadow compared to the growth in China.
To some extent, the situation reminds us of what happened in the markets in 2007 and early 2008. Investors are paying attention to markets outside the U.S.A., increasing their share in Asian assets.
Now, the main investment idea is a more decisive recovery of the Chinese economy, which not only stopped the decline but has already started the recovery, judging by PMI indices published last week. All this coincided with the quarterly portfolio rebalancing. The markets of those countries that have managed the coronavirus better are looking more and more advantageous. This has allowed the economy to reopen more quickly and has done less harm to business and consumer activity.
The U.S. has very high daily cases of coronavirus, with a 7-day average of 50,000. The total number there is approaching 3 million, of which more than half are active cases (one-third of the global number), which limit officials to lift restrictions and forces to return them in some cases. Politicians are now imposing restrictions more precisely, avoiding a national lockdown. However, this keeps businesses and consumers from fully returning to normality.
Under such conditions, the U.S. monetary authorities will continue to flood the markets with liquidity to support the national economy and avoid a financial crisis. However, since the dollar is the world’s reserve currency, it also increases liquidity for all markets, as the tide lifts all the boats at once.
As in 2007-08, investors use monetary easing and consumer stimulation in the U.S. to buy shares of regions with potentially the highest economic growth. In early 2008 this idea sounded like ‘decoupling’. It was based on purchases of commodities and shares of EM countries standing aside from the mortgage banking crisis. However, one should also remember the lessons of October 2008, when the world was taught a very painful lesson about how interconnected the global financial system is.
The tipping point came when it became clear that the Fed’s policy easing was not enough to fill the growing abyss with money. Right now, the U.S. central bank is coping with the task. But it is important to remember that the situation can change at any time and without warning. For investors, this means that the rally in the Chinese market and increased purchases of commodity assets can continue as long as the Fed manages to fill the entire global financial system with money. But will it always be like this?
