Donald Trump might not be heeding any advice of late, but given his rants about Jerome Powell’s handling of US interest rates he perhaps should listen to Jan Van Eck, eponymous chief executive at leading US and European ETF provider who in his 2019 outlook notes that the old investment adage ‘don’t fight the Fed’ still stands.
However, van Eck has a further message for investors that might go down even worse with the current incumbent of the White House – don’t fight the PBOC.
That’s the People’s Bank of China and Van Eck points to the interest rate cut in the summer as being likely to have a positive effect on the Chinese economy in the first half of next year.
“In China, I think stocks fell in 2018 as a result of the deleveraging in its economy that started a year or two earlier,” Van Eck says. “While there is a lot of time spent talking about short-term things like trade tensions and politics, my view is that we should really look at liquidity—that is, what central banks are doing to the markets.”
What’s more, he believes that investors should be taking this deleveraging as a highly positive signal, suggesting the 200 basis point cut would be “stimulative.”
“It usually takes about six to twelve months to kick in, so in either the first or second quarter next year, I think we can expect a boost to Chinese assets and the country’s economic growth,” he says. “Between now and then, there is going to be some uncertainty. First, we don’t know when the stimulus will kick in. Second, there are trade tensions. And, third, with Chinese New Year falling in either January or February, sometimes it takes until March before we know what happened.”
But Van Eck does have a word of warning for those thinking that the annualised growth in the Chinese economy seen in the early part of this century will continue. For him, 4-5% GDP growth is the new 8-10%.
“But the economy is large enough now that at 4% growth, companies can still grow profits at 10-20%, with some sectors growing at even higher rates,” he adds positively.
Seasoned China-watchers will doubtless be eyeing up every move on the part of President Xi who, as Van Eck notes, has in the past displayed a distinct bias in favour of the large state-owned enterprises or SOEs. “Policies that help SOEs tend to be negative for China’s private companies as well as for foreign private companies doing business in China.”
But the winds of change in in the air, Van Eck suggests. “The direction of China’s economic policy has been uncertain, but in the last couple months President Xi has signalled that he understands that private enterprise generates most of the jobs in China,” he says.
“That’s a key component, but we will continue to watch this space. China is competing for our investment dollars, based on not just growth rates, but also regulatory climate, and it’s a competitive world.”
Right hand, meet your left hand
Now as Van Eck readily admits, there is a contradiction at the heart of Chinese policy right now. Despite the growth slowdown, and the need therefore to stimulate more activity among private enterprises, the government is “doggedly” pursuing a reduction in so-called shadow financing, where the self-same smaller enterprises receive a lot of their finding.
As Van Eck says, “this raises the question: How can the government be stimulating, when at the same time, it’s trying to fix the imbalances in the country’s financial system – which is inherently not stimulative especially for those companies that can actually drive growth?”
His answer is that there are other fiscal and regulatory steps that China is taking that he believes will be net stimulative.
“If China‘s stimulus works, emerging markets should benefit on a relative basis,” he adds. “To oversimplify the world economy, there are essentially two engines driving it: China and the US. If the Chinese growth rate does start to look a little bit more attractive six to 12 months from now or if the US starts pushing forward, then I think that should help on the margin for commodity demand.
“If the pace of Fed rate hikes slows, with a possible pause to hikes in the next 12 months, gold should benefit.”
Looking beyond China, Van Eck posits that an interesting change has happened to the correlation between stocks and bonds in the US, one which has started to trend upwards. “This means that using long-duration bonds as a shock absorber or hedge in a portfolio may become more difficult,” he concludes. “Investors may need to look elsewhere for defensive positioning against equity risk.”