This article is part of Morningstar's special report on What the Experts Say
Investors must “stop obsessing” with the US and start to focus more in China as a barometer of global economic growth, according to JPMorgan’s Karen Ward.
The US has hitherto been the single biggest determining factor used by investors, market commentators and asset allocators when deciding which way the global economy is likely to head.
“In the 1990s it was right for us to just focus on the US because it was the main contributor to global growth,” Ward, JPMorgan's chief market strategist, EMEA, said at the Morningstar Investment Conference 2019.
That’s led to financial maxims like “when the US sneezes, the world catches a cold” and “don’t fight the Fed” . Now, though, investors should add “don’t fight Beijing” to their armoury, Ward believes.
These days, she explains, the US is simply not the financial epicentre it used to be. “China is now the main impulse through the global economy, so we have to spend more time thinking about what’s going on in China.
“You only have to look at last year to see that: the US was booming, and yet the rest of the world had a pretty awful year and that was because of China.”
Re-Writing the Rules
So, where does Ward think China is today? Last year, it had a big headwind in the form of US President Donald Trump attempting to re-write the rules of trade between the two global hegemonies.
At the same time, it was trying to cool its economy, which had previously been running pretty hot. “At this point last year, we knew that Beijing was trying to slow the economy,” says Ward.
“We knew that they were getting a little bit worried about the property market, as well as leverage and debt and that they had this new agenda of quality over quantity.” At the same time, though, the Chinese economy was slowing much more abruptly than any of us knew: “They slammed too hard on the brake.”
Fortunately, the authorities in Beijing realised they were being too heavy-handed. As a result, they’ve now taken their foot off the brake and slammed it back on the accelerator.
“The Chinese are certainly trying to generate further [economic] activity and just as in the 90s we developed the investing mantra don’t fight the Fed, I think you should also have in your armoury the mantra don’t fight Beijing.
“If Beijing wants 6% growth, they set a growth target and then they work out how to deliver it. I read all sorts of research reports saying they won’t be able to do it; every year they do it.”
Ward says she’s not worried about China this year and expects economic activity indicators to start to pick up in earnest through the year, leading to a pick-up in Asian growth and earnings, as well as better outcomes for emerging markets more broadly.
But, as we have explored recently, China also matter for Europe. Indeed, much of Europe’s companies gain a large portion of their revenues from China and the country’s growing trend for urbanisation and premiumisation.
Therefore, China’s difficult 2018 meant it was also a hard 12 months for Europe, which, on a stock market level, performed similarly to emerging markets. It also saw Italy slip into a technical recession with two consecutive quarters of negative growth, with Germany and France both narrowly missing out on the same fate.
“Countries like Germany have completely re-oriented themselves in the last decade towards the emerging markets," Ward explains. That’s a great idea in the long term, as emerging economies is where most of global growth is going to come from.
But it does leave them vulnerable in the shorter term to any slowdown in China, which we saw last year. Europe is also at the mercy of volatility in broader emerging regions.
For example, Germany is highly dependent on Turkish demand for its exports. Turkey, too, had a horrible 2018 and is generally “the real difficult case in the emerging world at the moment”. As a result, Germany’s exports to Turkey have fallen by a third. “That’s created a little bit more volatility in the European outlook,” says Ward.
That exacerbated a wider trend of collapsing export volumes for European countries, particularly the larger ones like Germany and France. The slowdown in China didn’t help, neither did the trade war.
US Eyes EU Automotive Sector
One would think, then, that a resolution on trade, which is expected fairly imminently, should be a boost for Europe. But once the US and China have agreed a trade deal, the question is whether Trump will turn his attention to US-EU trade relations. Specifically, the White House has its eyes on the automotive sector, which is crucial for the European economy.
The one factor that the trade war has really hit is corporate investment. Ward says: “The thing that in this expansion that has been consistently weak has been corporate investment. Corporates have just been unwilling to go ahead with big capex plans.”
That is starting to now pick up in the US, with US companies seemingly buoyed by movement in trade talks between Trump and President Xi Jinping. As a result, we are likely to see capex continue to tick up across the Atlantic.
But capex intentions have fallen sharply in Europe, cautions Ward. And any move from the US to start a trade war with the EU would supress corporates’ intentions on capital expenditure even further.
Therefore, while China may be on the way up, Europe looks to have a few challenges ahead still.
