Graph of the Week – China spillover has become a trickle

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.

Important information

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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