Forget China – it’s the US that really moves markets

Robeco’s Lukas Daalder says investors should focus on US more than Chinese growth fears and Middle East tensions.

The Chinese stock market fell 7% on the first trading day of 2016 after the country’s Purchasing Managers Index (PMI) for factory production fell below 50 for the first time, signalling contraction.

This was combined with the end of a ban on selling stocks by insiders coming into effect on 8 January.

Added to the new year’s malaise was a major diplomatic spat between two of the world’s largest oil producers after Saudi Arabia executed a prominent Iranian cleric for allegedly plotting against the Saudi government.

The bad Chinese and Middle East news sent European equities down over 3% and major US indices around 1.5% lower.

However, it is potentially poor economic data from the US, not China, that investors should be more concerned about, says Lukas Daalder, chief investment officer of Robeco Investment Solutions, which is currently overweight equities.

China spooks markets

“Chinese growth figures were weaker than expected, and this has spooked the markets somewhat, while the ongoing lifting of the insiders’ selling ban also caused a scare,” says Daalder.

“Added to that were the rising tensions between Saudi Arabia and Iran, which did not help sentiment and pushed stocks down further.”

“However, the Chinese stock market is by no means a good guide for what European or US stocks could do; it’s a standalone creature that really has a life of its own. Certainly if there is a 7% drop on the first trading day of the year then this is going to spook everybody, but in general we should not look at the Chinese market for the direction of overall stocks.”

He says the central issue remains the obsession both within and outside China that growth will hit its target of 7% this year, which looks increasingly unlikely as the country restructures.

“Chinese growth continues to be weaker than what everyone is hoping for, but in the end this will only trigger new policy responses by the Chinese authorities, which will boost growth and give better returns to stocks,” says Daalder.

“It’s more of a concern for emerging markets and consumer goods-producing countries, and to a lesser extent the producers of luxury goods in Europe. But in general, the European and US economies are not that sensitive to overall developments in China.”

Regarding the latest flare-up in the Middle East, he says: “The general rule here is that these issues always feel massive to start with, and we all think these conflicts will lead to a new world war or something, but nine times out of ten they die down.

“We had this with Ukraine and Russia, which everyone thought was going to escalate and then it didn’t, followed by Turkey and Russia. The situation between Saudi Arabia and Iran is certainly tense and needs monitoring, but does not necessarily have to end badly.”

“It’s not something that it is wise to act on if you have a multi-asset portfolio, where you sell some risk and then there is a political breakthrough, markets go back up, and you lose all the value.

“We are though overweight equities, so we are in a raw spot right now, and we’re discussing whether we believe it is a temporary blip or not.”

The US is the real concern

What would cause a rethink in asset allocation is any disappointment over US data, particularly after the Federal Reserve hiked rates for the first time in almost a decade just before Christmas, says Daalder.

“The real concern is the US economy, with ISM manufacturing figures down again in what looks like a very weak fourth quarter for the US economy,” he says.

“So far we have said the US economy will reap the benefits of the lower oil price and this will stimulate the economy; unemployment is still low and wage growth is picking up.”

“It would be very strange to now see the US economy heading towards a recession. But things have not picked up yet as much as some have hoped, and we are keenly looking to see what’s happening in the services industry.”

“The latest estimate for GDP growth as issued by the Atlanta Fed is 0.8% in the fourth quarter which would make it one of the weakest quarters in 2015. So far we have always been of the opinion that the US economy will be OK, so we need to see a change in services in order to have a serious problem.”

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