Midweek Musings – Coughs and sneezes?

You probably know the old stock market axiom: When America sneezes, the world catches a cold. It seems reasonable that problems in the world’s largest economy are likely to have an infectious impact on at least its main trading partners.

I am not sure anyone has ever transposed the world’s second largest econony, China into a similar adage. Maybe this: When China coughs the world gets a pandemic. Too much irony?

I have written about problems in the Chinese economy several times this year and my take on how that impacted asset allocation calls. I have excluded China focused funds from my portfolio and gone even further in reducing weightings in Emerging Markets and Asia Pacific because of the risk of local contagion.

There are of course some funds in these sectors with no direct China exposure and they have been doing rather better recently but my comment about the impact on main trading partners remains applicable, I suggest.

What we saw at the start of this week was something I think is new – global markets in general sold off solely because the (not new) bad news from China was at the top of news feeds.

We can expect the Chinese government, with its advantage of autocracy in economic policy, to take steps to ensure that Mr Xi can say his growth targets have been met. Unlike Mr Sunak in the UK, he has virtually no risk of not seeing his targets met because if necessary he can change the way the statistics are published, as has just happened with youth unemployment data in China (it has vanished from official published counts).

However, many economic prognosticators will have built their models for global ecomic growth on the assumption that China would likely boom coming out of zero Covid. Not only does that look highly unlikely now, but there is a more serious property crisis emerging that could have domino effects on financial markets in China and even beyond – emerging market bond funds, for example.

This is what has troubled markets this week and adds to a febrile August to date. However, August often seems like that to me and it is probably one of the least useful months of the year in which to take the temperature of markets. So don’t panic!