From the rapid nosedive following lockdowns in March 2020 to springing earnings in the first half of ‘21, we’ve moved through this business cycle at top speed. It’s time to take a look at potential market implications and ask ourselves: does economic payback await?
While we’ve all enjoyed some return to normality as vaccination rates increase and shops and pubs repopulate, investors are starting to question the growth narrative: can we continue to expand from here? Is an end to quantitative easing around the corner? And paramount to that: where exactly are we in the business cycle?
The chart below gives an overview of the phases of a general cycle. You can see clearly what we experienced last year—the trough of early 2020—and also the upturn we began to enjoy as vaccines were disseminated and workers returned to the services and manufacturing industries. We’ve steamed through the cycle at a very rapid pace, and the question we’re now asking is: how soon will we step out of box 6 and move into the peak of the cycle?
The recession wrought by Covid was unique. There was a sudden drop in GDP (the result of shutting down the economy overnight) followed by an almost immediate recovery back to levels seen pre-pandemic. The most stunning aspect of this bounce-back is how quickly it happened—a consequence of unprecedented monetary stimulus and fiscal support. Interest rates languished at zero; central banks bought corporate debt as well as sovereign. Bankruptcies were avoided by the protection of stimulus, and barely a year had passed.
And now the question is, of course: will there be retribution for eliminating the stresses that otherwise would have pressured the system? Probably. And the way that payback is likely to manifest is in the form of inflation. Now the journey becomes more arduous. Growth rates will slow while inflationary pressures rise. Corporate news flow is littered with companies intending to pass cost pressures on to their customers. Will the Fed begin to taper, an indication that we're moving into box 1 of the business cycle, which starts to get a bit riskier?
We're not there yet. From an investment perspective, we still favour equities. Just remember the pace at which this cycle proceeded and be ready when defensive positioning is needed.
“People have been talking about inflation for a long, long time (since the Great Financial Crisis), but it’s never really materialised—until now.”
Philip Smeaton, Chief Investment Officer
Investment view: Are China’s stricter regulations as worrisome as they seem?
As The New York Times touted just last month, “A portfolio in 2021 isn’t global without China.” But neither, it seems, is a financial news report. With fresh crackdowns on numerous sectors (tech, education) being introduced almost by the day, investors would be forgiven for eschewing the once-sleeping giant.
But as always, it’s important to view this with a wide lens and play the long game. The recent regulations imposed on some of China’s major industries aren’t so much about business as they are about government, or more accurately, governing. Case in point: it was announced on 25 August that ‘Xi Jinping Thought’ (apparently similar to Marxism) will henceforth be included in the national curriculum for all Chinese students from children to college kids.
The story in China is very much about the man behind the mandates, and analysing the mind of a man to determine his actions is hardly a scientific endeavour. Yes, President Xi wants a stronger grip on power for his party. But let’s take a look at the facts.
In November 2020, the State Administration of Market Regulation (SAMR) officially introduced new rules with which it would regulate Chinese tech companies. The SAMR headed straight for the top, fining tech giant Alibaba a record US$2.8 billion in April as a result of an antitrust probe and quickly calling up 34 other major tech and media companies (among them Tencent, Baidu and Meituan) on accusations of misleading the public and ‘merger irregularities’. A handful of ride-hailing apps were suspended for inadequate data security.
Here’s an interesting way to look at it: a number of outlets, including the Washington Post, have professed that China is just doing what that other producer of tech titans, the United States, wants to do but just can’t seem to: effectively regulating one of its richest industries. Could the Chinese crackdown be akin to the implementation of ESG initiatives? After all, crafting a portfolio with sustainability in mind is a desirable way to invest these days, and, as evidenced by the chart below, the Shanghai Composite actually rose in August.
But of course, this is a picture of moving parts, and as such, investors should proceed with caution. The 21st century has seen Napoleon’s giant awake: China has incubated many successful companies in the age of the internet, which is why the Communist Party now seeks to regulate them. An increase in regulatory risk is certainly something investors should both control and look to be compensated for.
A wise investor might limit the capital he or she deploys into the region, but as ever, it is important to stay objective when considering risk. These businesses are a victim of their own success—despite the increased risk, they are infused with the Chinese entrepreneurial spirit and remain a key ingredient in the recipe for future growth.
The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.