The attention between the two big powers, the US and China, has grown over the years and the world has become ever more divisive as a result. Not only that, we witnessed a decoupling in their economies and financial markets.
The US stock market has done very well in the past 13 years while Asian stocks struggled to keep up. China had a bad 2021 as many companies were put under the regulatory microscope. US continued to do well in 2021 with S&P 500 returning over 20%.
But, this year started bad for the US.
NASDAQ has gone down 11% while S&P 500 is down 7%. In contrast MSCI China is up 3%.
There is a sudden change in the US monetary policy.
US has inflated the markets with lots of liquidity after 13 years of money printing and this is ending. Liquidity is withdrawing and investors are reacting to the change in tide in advance, creating a selldown.
China has been lowering interest rate too in the past 10 years but the rates have been held steady for the past 2 years. They didn’t cut rates even during Covid.
US instead pumped a record liquidity in the same period, and setting a precedence of buying ETF assets.
Instead of tightening, China announced a surprise rate cut on 19 Jan 2022. This sent Chinese stocks soaring for the day. Whether if this is sustainable is another question.
One thing for sure is that central bank interventions have become an important factor on how the stock market would do.
High tide (low interest rates) lifts all boats and low tide (high interest rates) lowers all boats.
This has nothing to do with the fundamentals of the companies.
In terms of economy, China was the only major country to enjoy a positive GDP growth of 2.2% in the Covid year (2020).
US was down 3.5%, worst since WWII.
US grew its GDP by 2.3% in 3Q2021 while China grew by 4% in 4Q2021. Both showed deceleration in growth but 2.3% is above the long term GDP growth rate of 2% for the US.
For China, the expected GDP growth rate should be 6%. Hence, on this front, US economy seems to be humming along fine while China’s economy is slowing.
The financial markets have been moving pretty much in tandem prior to 2008. Somehow, the world has changed. It might be due to the rise of China and the world has become more bipolar and decoupled.
I believe that it’s possible to invest successfully in the China markets, we just need to approach them with the right frame of mind. I’ll be sharing how I invest in strong Chinese stocks using the 3Cs – join me at my next webinar.