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Can the US and China successfully heal and reboot global share markets?

June 2020

How are the US and China currently placed in tackling the deep global recession caused by the COVID-19 pandemic? Will these global superpowers ‘reboot’ and boost global share market returns?

COVID-19 recession

The lockdown and isolation measures designed to control the spread of COVID-19 have had some destructive economic consequences. There’s no doubt that some 10 years out from the Global Financial Crisis (GFC) we are again confronting another deep recession.

Many countries, (Japan and parts of Europe, except Germany) entered the COVID-19 pandemic with large amounts of debt and, in many cases, negative interest rates and the pandemic’s economic cost may damage global growth prospects further.

Share markets will be watching closely to determine which countries can best re-open the economic system while limiting the re-acceleration of the infection rates.

Phases of healing

The health crisis can be broken down into four phases:

Phase 1 - Flattening the infection curve by lockdowns such that the hospital system can cope with the pace of admissions.

Phase 2 - A gradual re-opening of the economy while managing recurrent outbreaks that are tracked by extensive virus testing and suppression.

Phase 3 - The establishment of a sustainable pace of infection for over six months that acts to restore household and business confidence.

Phase 4 - A vaccine that restores a high degree of normality.

We think that between Phase 1 and Phase 2 we are likely to see the bottom of the global economic cycle. However, the strength of the ensuing recovery will be largely determined by success in

In repair - China versus US

In comparison to China, the US has not been as successful at fighting COVID-19. While China is in Phase 2 and looking to build to Phase 3, the US is still in late Phase 1. The infection rate in the US is extremely high and the pace of flattening the infection curve is, at best, modest. However, the US is already re-opening its economy.

On the economic front, the US is also lagging China. However, relative to China at this stage of the infection spread, the US is re-opening relatively early. This does raise the risk of a re-acceleration in infections that could result in lockdowns being re-implemented in Phase 1. This risk is likely to be the main threat to the current solid share market rally.

US leads in share market returns

The one key area where the US continues to lead China, and the world, is returns in its share market. This reflects the strength of the technology sector as the US continues to lead the technology race at this stage. That said, in certain sectors, like 5G, China has now assumed leadership.

US technology stocks such as Apple, Google, Microsoft, Facebook and Amazon, have remained strong through the share market correction, reinforcing the trend of significant outperformance over recent years.

The S&P 500 (the stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the US) has bounced by around 33% since the late March 2020 low, while Chinese equities are up a still solid 13%. 1

US and China tensions – a threat to markets

Tensions between the US and China have continued to escalate on the back of a swathe of issues, backdropped by the World Health Organisation’s agreement to run a COVID-19 inquiry. In addition, China’s move to introduce a controversial security law to tighten its control of Hong Kong has added to frictions and China is now pointing to the social unrest in the US in response.

US technology shares could be vulnerable to Chinese retaliation because of their high dependence on China as both a manufacturing hub and a large source of revenue. And with an election nearing, US President Trump may become even more aggressive towards China, posing even more risks for markets.

Optimism for markets but caution needed

On the positive side, while US economic and health stabilisation lags China’s, technology stocks have continued to outperform to date. If the recovery can build through Phases 3 and 4, as expected through the rest of 2020, there could be a broader recovery that sees good share market investment opportunities extend outside of the technology sector.

However, while we may be reaching the bottom of the economic cycle and gaining confidence for recovery in 2021, the threat from a large second wave spike in infections is significant. The rising tensions between the US and China may also pose a threat to markets that could even see even technology stocks trading lower.

As always, you should continue to seek quality advice about your own personal financial goals before making shifts in your investment strategy.

1 Indexes used – S&P 500 and MSCI China, 23 March 2020 to 28 May 2020

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This publication is issued by ‘OnePath’ (OnePath Funds Management Limited ABN 21 003 002 800 AFSL 238342 - OnePath Funds Management and OnePath Custodians Pty Limited ABN 12 008 508 496 AFSL 238346 RSE L0000673 – OnePath Custodians).

This article contains general information and may also contain professional opinions which are given in good faith and based on information and assumptions believed to be reliable as at 11 June 2020. The author makes no representation as to its accuracy or completeness and the information should not be relied upon as such. Any opinions, estimates and forecasts herein reflect the authors’ judgments on the date of this publication and are subject to change without notice.

It does not take into account an individual’s personal needs, financial situation or objectives, requirements, personal needs or financial circumstances or tax position. Information does not contain and should not be relied upon as containing investment recommendations or advice and does not constitute an offer or an invitation to deal in, or a recommendation to acquire or sell any product or subscribe to any service. Further, information in this article should not be viewed as a medical opinion or relied upon as such.

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