The United States government is in the process of debating both a budget as well as a debt ceiling increase. Neither Republicans in the House of Representatives nor the president himself appears eager to pursue a “grand bargain” or a “mini bargain.”
Meanwhile, Angela Merkel may have won a resounding victory in Germany’s recent election, but the euro-dollar came under pressure against world currencies on concerns that it may take Ms. Merkel many months to form a coalition. In other words, stalemates in developed countries abound.
In contrast, there seems to be little uncertainty about where China is heading. Recent manufacturing activity showed economic expansion at a 6-month high. Indeed, just a few moths prior, investors had been abandoning the world’s second largest economy on fears of a slowdown/hard landing accompanied by a housing bust. Doom-n-gloomers on China’s prospects are — for lack of a better analogy — eating slices of humble pie.
In early August, I noted that a meaningful rotation into China ETFs was well under way, even though money flow data did not support my contention. What did support it? Price performance, a series of “higher lows” on charts, improving economic fundamentals as well as a new leader who tied government policy to GDP growth at 7% or higher. The “higher lows” on SPDR S&P China (GXC) can be seen in every month since a bottoming out in late June.
Granted, quantitative easing (QE) stimulus may be the elixir that everyone clamors for in the shorter-term; stock investors certainly appear to blindly reward markets where a central bank buys bonds to ensure unnaturally low interest rates. Still, like any addiction, one needs more and more of a drug to maintain the same “high.” Any Fed tapering may be viewed with trepidation, not just for bonds, but for stocks as well. It follows that China’s more modest use of conventional and/or unconventional stimulus measures is likely to reward believers in the prospects for Chinese equities.