China has been ‘largely missing in action’ as a market driver, strategist says

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Wed, Dec 22, 2021, 9:24 AM

- Yes, definitely. Coming into the start of this year, we said that the market breadth, which was extremely narrow in 2020, would improve. We also said that analyst earnings estimates had been cut drastically for not just the pandemic year in 2020 but for 2021, 2022, and beyond. We said that was a mistake, that we would see the recovery in earnings estimates happen during the course of 2021.

And in fact, that's exactly panned out. We've been saying that this is definitely a buy the dip sort of market, because we expect more earnings upgrades to come. We think that the real debate should be about the length and strength of the economic cycle ahead. There's a ton of investments that need to go in for net zero.

There's a lot of obsolescence in the system that needs to be replaced, and a huge amount of investment that needs to be made in automation and supply chain rewiring that really is a kind of a multi-year, pent up demand that is now really catching up. So we think that the US consumer, as you've just mentioned, is in a very good shape right now. Because house prices has a dramatic wealth effect.

It also has the largest multiplier effect on the economy. And house prices are increasing very nicely this year. So I think all told, the manufacturing side of it has good pricing power, good order books, and a multi-year CapEx cycle ahead, and the consumer is actually in good shape. So for all those reasons, we think that the next set of earnings releases in Q1 and Q2 of next year should have an upward bias, which makes it a buy the dip sort of market.

- Let's pick up on that CapEx cycle. No question, a lot of companies looking to put their money to use. You mentioned investments on the renewable side, automation. How much of that outlook is clouded though now that Build Back Better is in question? You had some revising their growth outlooks next year. How significant is it if, in fact, this bill isn't passed?

- Well it is definitely a factor in terms of acting as a catalyst for a lot of investments. But I think over the last 10 or even 15 years not a huge amount of investments have been made in the economy. So whilst it is a factor, I think it's a relatively small factor. Most companies, when you think about their capacity utilization, the number is not really a representative number of the real capacity because so much of obsolescence in the system results in inefficiency.

So the real efficient capacity is much less than what you see on the headline. And the other thing to note is that not a lot of debate and discussion is being had about China. China has been largely missing in action, I would say, as a market driver, as a sentiment driver as well for the longer term outlook. And our impression is that speaking to companies and building up that view of the top down from the bottom up, company by company, we see that the growth outlook in China has likely to have bottomed already in Q4.

So if you put it all together, I think for 2021 you have a very strong, resilient US outlook. But to that, you have to have additional growth and additional investment spend that is really coming from the Chinese side as well, really from the Asian side. India is another market where we see a tremendous amount of positive potential for recovery coming through as well. So major economies around the world are likely to be in a more synchronous outlook for growth in 2022.

- On China, there's the growth outlook overall and then there's the question of where the Chinese money moves. We've seen the crackdown here in the US, with the SEC essentially saying if you don't follow those accounting rules for all other foreign companies there will no longer be a place for you on US exchanges. Going into 2022, do you see some of the money shifting more to Hong Kong? How do you see that playing out?

- That's a great question, Akiko. I think the easy call for 2022 is that you'll see many more companies doing secondary listings in Hong Kong during the course of the year. I think it just makes good insurance policy. So companies that are listed through ADRs in the US market, you should expect them to pursue secondary listings.

The other thing to note is that the SEC has actually given these companies sufficient breathing time. There's a 2024 deadline that the SEC has put in, which means that it's not a major panic situation at all. So companies have sufficient time to plan. But you should expect more secondary listings.

As far as the shift is concerned, yes, we think there will be a shift. But money is fungible in the sense that ADRs can be swapped into a local Hong Kong listing. So you should expect some release to come through as the markets begin to understand that there is a plan, there is a framework, and it is not as if these stocks are facing an imminent delisting fear at all.

- Yeah an interesting story out from the FT today about how US exchanges are now trying to recruit Southeast Asian companies as well as Indian companies to try and maybe fill the void left by some of these Chinese companies leaving.

Anik, it's always good to talk to you. Anik Sen, PineBridge Investments global head of Equity.

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China has been ‘largely missing in action’ as a market driver, strategist says

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