Is now the time to invest in China? Negative leading indicators for economic development in the USA.

Chart of the week

The chart shows the monthly change in US consumer spending. An increase of 0.1% was expected for the April figure, but a decrease of 0.1% was published last week.

At the same time, inflation figures were published, which continued to fall in May.

Why this is important
The situation continues to be mixed, as in previous months. The good and bad economic figures balance each other out. The fact that inflation is continuing to fall is excellent news, but the fact that consumption is collapsing is bad news.
In such market phases, it is important to have a long-term plan and not to be distracted by a few individual pieces of news. Our long-term model is as follows:

We believe that we are currently in phase 4 of the long-term financial market cycle. The model will only switch to the first phase once the first interest rate cut has taken place. This is currently expected in the fall of 2024. Last week's economic figures are not important enough to change the position in the long-term financial market cycle, so we do not react to such news.
Negative leading indicators for economic development

The chart shows the relative performance of the S&P 500 compared to an equally weighted index of the S&P 500 since 2007.

In an equal-weighted index, each stock in the index has the same weight, regardless of its market capitalization. The S&P 500, on the other hand, is a market capitalization weighted index, which means that larger companies have a greater weight in the index than smaller companies.

The chart shows that the equal-weighted index has underperformed the S&P 500 since 2007, indicating that large-cap stocks have outperformed small-cap stocks over this period. This is a sign of low market breadth.
Market breadth refers to the number of stocks involved in a market move. In a bull market with broad market breadth, many stocks rise in price. In a bull market with low market breadth, only a few stocks rise.
Low market breadth, almost as low as in the financial market crisis of 2007, can be a cause for concern as it can be a sign that a bull market is coming to an end. If only a few stocks are driving the market higher, there are fewer stocks that can participate in the rally. This could mean that the market is running out of steam.

The chart shows the ratio between full-time and part-time positions (light blue line). The falling line shows that the proportion of part-time jobs is increasing. It can be seen that the line drops significantly in times of recession (GFC and Covid-19). This means that the number of part-time jobs has increased more than the number of full-time jobs.
Financial analysts are of the opinion that this increase in part-time jobs in relation to full-time jobs is a sign of a weakening economy. There are two main reasons for this:

- In times of economic downturn, companies are more likely to reduce the number of working hours than to lay off their employees completely. This allows them to reduce labor costs without having to bear the severance costs associated with layoffs.
- Employees may be forced to take on part-time work because they cannot find a full-time position.

In der Vergangenheit war das immer ein Vorindikator auf eine sinkende Vollbeschäftigung.

Beide Grafiken erhöhen für uns die Wahrscheinlichkeit, dass wir auch im aktuellen Zinserhöhungszyklus, der einer der schnellsten und höchsten in der Geschichte ist, eine Rezession sehen werden
Ist jetzt die Zeit, um in China zu investieren?

Since the high in January 2021, the Chinese stock market (shown above on the Shanghai Shenzhen Stock Index) has lost almost 40%. Since the low in January 2024, however, the Chinese stock market has already gained 20%. Is now the time to invest in China again?
The return on Chinese equities has been poor in recent years for the following reasons:

- The strict COVID policy has cost a lot of growth. In addition, the hoped-for post-COVID recovery, as has happened in most Western countries, has failed to materialize.
- The real estate crisis is still not over and has massively changed the consumer habits of the population.
- COVID has shown the world the difficulties of excessively branched production chains. Industrialized nations are onshoring. Production capacities are being built closer to the home markets. Direct investments by industrialized countries in China are falling sharply.
- China has increasingly intervened in the free market and restricted the business opportunities of entire industries. This has scared off many foreign investors.
- Increasing rivalry between the USA and China. A few weeks ago, Biden reignited the trade war with 100% import tariffs on electric cars. If Trump is elected as the new president, the conflicts are likely to intensify.

The chart shows another reason why companies no longer choose China as a production location. The chart shows the increase in unit labor costs for manufacturing in USD per hour in China. China is no longer a country where production is cheap.
BUT, China is the third largest economy in the world and ranks fourth in terms of innovation. China will probably not overtake the USA and Europe as the largest economies in the near future, but there are still opportunities for investors.
As a lot of negative news has already been processed, it is quite possible that the CSI 300 has now bottomed out. However, investments in China require a lot of patience and volatility will remain high.
China is not China. There are three different markets for Chinese equities:

- H-shares:
Shares of Chinese companies that are traded in Hong Kong. The stock exchange in Hong Kong has significantly higher compliance rules and only the Chinese companies with the best compliance and governance rules manage to register. This gives investors greater security. But many of the companies registered in Hong Kong are very export-oriented.
- ADRs:
Shares in Chinese companies that are listed on a stock exchange in the USA. These companies will be the first to feel the effects of an escalating trade dispute between the USA and China. There is no ETF for this, but you can buy the individual shares.
- A-shares:
Shares in Chinese companies that are listed on a local stock exchange in China. Here you will find many small local companies that are only active in the domestic market. In the event of a trade dispute, they may even benefit if the import of foreign products is banned. We currently see the best opportunities in this segment.

Conclusion:
The stock market in China appears to be stabilizing. After a loss in value of around 40%, most of the negative news seems to have been absorbed. Nevertheless, patience is required. China is unlikely to reach new all-time highs in 2024. The trade dispute with the US in particular will cause repeated setbacks.