Have gains of over 30% since 23 September in the equity market of the world’s second largest economy – China – had significant positive spillover effects into the markets of other countries, particularly those with high exposure to commerce with China? One would have thought so. Is it really the case?
China represents 12.4% of revenues for the companies in the MSCI Australia index, 9.4% for Japan, 7.4% for the US, and 6.4% for Europe, according to FactSet. The gains in these stock markets, while initially fairly strong, have faded. They are now up by just 0.3%, 3.8%, -0.4% and 0.8%, respectively, in local currency terms.
Those lacklustre results suggest the striking performance of Chinese equities reflects more investor positioning than a massive change in views on the economic outlook.
Many hedge funds were short the Chinese market; those positions came under pressure after the market turned around on Beijing’s announcement of a large stimulus package in September; hedge funds were then forced to buy stocks to cover the positions.
As for any spillover effects, the prospects for (continued or faster) growth in China appear to no longer have the same global impact as they used to when heavy investment in infrastructure boosted imports of foreign commodities and fast rising incomes drove domestic demand for foreign luxury goods and cars.
The good news for investors may be that the global economy no longer depends so much on the revving of China’s engine.
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