Don’t Ignore China

Last week, there was a lot of news about China in the financial media.

While we all know China is an integral part of the global economy, most U.S. investors spend little time thinking about their domestic economy.

That isn’t the wrong move. What is happening in China doesn't generally impact the US economy and stocks much.

I can hear some of you howling out there, but this is true.

This doesn’t mean it doesn’t matter at all, but the Chinese domestic economy is not a material driver here in the United States.

Look at the last fifteen years.

Despite all the talk of the Chinese economy's growth and the "inevitability" of becoming the world's largest economy, the country has seen a lost decade and a half.

Their stock market does not define their economy but is a pretty good proxy. Here is the stock chart of their benchmark Shanghai Shenzen CSI 300 Index…

After a nice move in the early 2000s, it peaked in 2007 and has struggled since then. While it got close to that old high post-COVID, it has been trading down brutally for the last couple of years.

What is going on?

It is simple. The Chinese economy saw a huge real estate bubble like the United States. Unlike the United States, though, China is not capitalist but a mix of communism and socialism with a capitalist wrapper.

While our economy adjusted with major bankruptcies and the troubled real estate being "digested" by our system, China never addressed the issues.

Much like an infection in the human body, the persistence of the problem without finding real solutions has debilitated their economic growth and the stock market.

The Chinese government was not willing to make the hard decisions necessary to move forward, which would involve admitting it was wrong.

There are still no quick and easy fixes, but last week did change the situation.

Early in the week, the Chinese central bank announced that it would engage in a massive stimulus package. They had resisted this for several years.

Again – this would be an admission of failure of their policies.

The bigger news, however, was when their top political leaders came out swinging. They said they would deploy the "necessary fiscal spending" to return to their economic growth target of 5%.

We deplore the Chinese government's actions on many levels, but we will say one thing for them. They do what they say they are going to do, whether it's good or bad.

This kind of announcement is NOT something we usually see happen in China.

The legendary investor David Tepper of Appaloosa Management (whom we profiled last week) provided some great insights into the situation on Thursday on CNBC.

You can watch him here.

https://www.cnbc.com/video/2024/09/26/david-tepper-dont-love-u-s-markets-on-a-value-standpoint-but-i-sure-as-heck-wont-be-short.html

Why should we care about all of this? Didn’t we start by saying that the Chinese domestic economy had little impact on the US economy and stock market?

It doesn’t have a lot, but it does have some.

We think that the Chinese government's aggressive stimulus will help not only Chinese stocks - many of which are listed in the United States - but also other large groups.

Luxury goods stocks and casinos have been hit hard by the downturn in China. Unlike in prior periods, the government seems to be targeting domestic consumption.

These stocks could see benefits and are coming off deeply oversold levels.

We also think that increases in Chinese economic activity could put a big dent in commodities. Many of these - like oil and copper - have sold off recently, but they could recover.

Lastly, we think that additional stimulus in China just means more stimulus for the global economy.

It might end badly, but that IS good for stocks globally in the near term.

Many of the sectors we mentioned above saw huge moves last week, and we wouldn't necessarily buy them today. However, we could be at the start of a multi-quarter recovery in Chinese-related stocks.

Remember what happened in the US when we pulled out all the stops in 2009 to emerge from the Global Financial Crisis? Numbers remained terrible, and skepticism was high. Yet stocks continued to march higher.

We will be watching to see if something similar develops for these stocks.

In the meanwhile, we are certain that this is NOT bearish for global stocks and adds to the constructive backdrop.