Implications for investors
Risk assets sold off sharply in China and around the world in late January and early February but have since regained nearly all their lost ground. The market appears to be looking beyond any near-term fallout from the coronavirus outbreak, and investors are clearly sanguine on the outlook for Chinese stimulus yet to be unleashed. However, we think the picture is more nuanced that this.
In the near-term, we anticipate some potential corporate bond supply risk and wobbles in market. Broadly, markets appear to be pricing in a weak first quarter for China followed by a stimulus-driven rebound. Equities are likely to remain volatile and fresh record highs in the US, for example, suggest global investors may be erring on the side of optimism. Elsewhere, commodities like oil, copper and even coffee have traded lower in recent weeks.
We don’t see the renminbi at significant risk of depreciation against the dollar at present, as an aggressive move in the current environment would be detrimental to the longer-term prospects for China’s recovery. Around the region, economies impacted by tourism, like Hong Kong, Singapore, or Thailand, should see policy support or rate cuts - and likewise for countries intertwined with China’s industrial sector and supply chain, like South Korea.
Amid all of this, there are bound to be miscalculations, and surprises, for investors.
There is a chance that forthcoming stimulus measures from Beijing could fall short of what’s already been priced into the market. On the other hand, there are also risks if China opts for a bolder policy response that exceeds expectations. This would inevitably lead to a short-term sugar high for markets, but one that is followed by misallocations of capital that may not become evident until much later, with negative long-term implications for China’s ability to manage its debt burden. In this environment, we’re happy to remain selectively overweight on credit risk.