One swallow doesn’t make a summer

Thought of the day

by Chief Investment Office 14 Feb 2019

After a decline in December, China’s exports unexpectedly returned to growth in January, expanding 9% y-o-y. Imports fell by 1.5% y-o-y, a much smaller decline than anticipated.

But while at first glance this might suggest that China's growth slowdown is ending, we see reasons to interpret the data more cautiously:

  • More than one month’s figures are needed to clarify the outlook for China’s economy. The trade data will have been distorted by both the Chinese New Year holiday and US tariffs. Chinese companies tend to increase export shipments and imports of raw materials ahead of the holiday, which fell earlier this year than last. Exports will likely also have been boosted by front-loading of shipments ahead of potential US tariff increases.
  • Other recent Chinese economic data has disappointed. The manufacturing PMI has dropped below the 50 level which separates expansion from contraction and is at its lowest level since February 2016. Domestic headwinds and uncertainty over US trade relations are continuing to weigh, and we project 6.1% GDP growth for 2019, after 6.6% in 2018. At close to 6%, economic expansion is the weakest since 1990 (3.9% y/y).
  • Optimism on China’s trade data was bolstered by press reports that President Donald Trump is weighing a 60-day extension to the 1 March deadline for tariff increases in order to “give negotiations more time to continue.” An extension of talks is in line with our view that a further increase in tariffs can be avoided, and a near-term deal could boost risk assets. But we continue to believe that the US–China dispute over trade is a symptom of a much deeper conflict for technological supremacy that will prove far tougher to resolve.A slowing economy is not the same as a stalling one. China’s authorities have historically proved successful at managing growth slowdowns and are using both fiscal and monetary policy to stimulate the economy (we expect further cuts of 100–200bps in Reserve Requirement Ratios). Last year’s weak performance by Chinese equities also priced in a lot of bad economic news. Even after recent gains of 13% ytd, MSCI China's 12-month-forward P/E is 10.8x, a relative discount to its 15-year average of 11.5x. We continue to prefer Chinese equities within our Asia portfolios.

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