Sarasota financial advisor: Don’t panic over trade tariffs!

Sarasota financial advisor: Don’t panic over trade tariffs!

By Ray Collins | May 15, 2019

John Mousseau says it is important not to get caught up in concerns about a trade tariff war with China.

“If you’re sitting there and you read just the headlines, it looks like a cannon ball shot across the bow of the ship. In essence what it is, is just a shot in a longer term negotiation. I think it was long overdue to negotiate with some trading partners. The U.S. — in terms of being a world partner — has given up more than it has gotten in the last few years,” Mousseau said.

Mousseau said neither the U.S. or China wants a full-scale trade war.

Read and see more stories by Ray Collins here:  https://www.mysuncoast.com/authors/raycollins/

 




Cumberland Advisors Market Commentary –  Robert Brusca Ph.D. on Tariffs, Trade, and the Fed

Market-Commentary-Cumberland-Advisors-Trade

My longtime friend and veteran international economist, Bob Brusca, has given us permission to publish his superb discussion of the trade war effects.

Here is the link: Robert Brusca, Ph.D. of FAO-Economics on Tariffs, Trade, and the Fed

-David




This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

This Is a Serious Confrontation Between World’s Biggest Economies, Says Cumberland’s Kotok

Bloomberg Daybreak Asia
May 9th, 2019, 9:10 PM EDT
Bloomberg-This Is a Serious Confrontation Between World’s Biggest Economies, Says Kotok

David Kotok, chairman and chief investment officer at Cumberland Advisors, discusses the U.S.-China trade negotiations and their impact on markets. He speaks on “Bloomberg Daybreak: Asia.” (Source: Bloomberg)

Watch at on Bloomberg.




Cumberland Advisors Market Commentary –  US-Canada Economics: An Interview with Susan Harper, Consul General

Financial Markets and the Economy – Financial Literacy Day III, the conference that Cumberland sponsored at the University of South Florida Sarasota-Manatee (USFSM) on April 11, featured a conversation between myself and Susan Harper, Canada’s Consul General in Miami.

US-Canada - An Interview with Susan Harper, Canadian Consul General, Miami

I opened the interview by expressing my personal view of the importance of the durable relationship between the US and Canada and why we must not undermine it. Then I gave Susan the floor. She shared with us some very interesting and quite eye-opening statistics on the US-Canada economic relationship.

The US and Canada are each other’s largest trading partners, but what is somewhat surprising is the extent and significance of the Canadian economic presence in Florida and in the Florida West Coast. Some 500 Canadian companies are present in Florida, at nearly 3500 locations.

Exports

When we think about the impact of a foreign country on our economy, we tend to think first in terms of exports – how much do we sell to them? Well, the US exports more goods to Canada than it does to China, the UK, and Japan combined (Source: Susan-Harper-Canada-Conversation-Slidedeck).

US-Canada - An Interview with Susan Harper, Canadian Consul General, Miami Trade Chart

Among all nations, Canada ranks second in exports from Florida and third in services exports. Canada is also third in imports to Florida, first in visitors to Florida, and second in investment in Florida (figures from the Florida Chamber of Commerce).

Thirteen percent of Florida’s exports go to Canada, an amount totaling $51.6 billion in 2018. For Hillsborough Co. (Tampa), those figures were 25% and $5.7 billion. The value of exports to Canada from other West Coast counties is as follows:

Pinellas (St. Pete, Clearwater) $381 million
Manatee $72 million
Sarasota $99 million
Charlotte $29 million
Lee $72 million
Collier $100 million

Source: Susan-Harper-Canada-Conversation-Slidedeck

Jobs

Susan told us that if trade with Canada ceased, 600,000 (plus or minus 20,000) jobs would be lost in Florida. She had figures on potential West Coast county job losses, too:

Hillsborough (Tampa) 77,420
Pinellas (St. Pete, Clearwater) 25,507
Manatee 5,951
Sarasota 8,062
Charlotte 2,111
Lee 8,286
Collier 9,594

Source: Susan-Harper-Canada-Conversation-Slidedeck

Tourism

Canadians are by far the largest source of international tourism to Florida. (The UK is second, with about half Canada’s total.) In 2018, some 3.5 million Canadians visited Florida (out of a total Canadian population of 35 million)! Of that number, 26% visited Tampa and 12% visited Sarasota (Source: Susan-Harper-Canada-Conversation-Slidedeck).

Real estate

Canada’s residential real estate portfolio in Florida totals $53 billion, with about $4 billion (net) purchased annually. Thus Canadians contribute over $500 million a year in property taxes.

Note residential real estate portfolio figures for the West Coast counties:

Hillsborough (Tampa) $35 million
Pinellas (St. Pete, Clearwater) $142 million
Manatee $121 million
Sarasota $194 million
Charlotte $50 million
Lee $471 million
Collier $630 million

Source: Susan-Harper-Canada-Conversation-Slidedeck

Issues

Pondering this data, I remarked to Susan, “When you think about the conversation about tariffs, trade, and all the flow of news, there is a different perspective when this kind of information is in front of you.” We then tackled some of the issues that are disrupting the US’s relationship with its most important economic partner.

The perverse notion that Canada is a security and defense threat to the US was invoked by the Trump administration in order to levy steel and aluminum tariffs. Ironically, the administration has subsequently granted far more waivers of these tariffs to Chinese firms than to Canadian ones. According to Susan, for the 25% steel tariffs, 40% of waiver applications from China have been granted, but only 2% of those from Canada. For the 10% aluminum tariff the ratio is even worse: 85% of Chinese waivers have been approved, but only 0.2% of Canadian ones.

The irony is heightened by the fact, as Susan noted, that the Canadian armed forces and Mounties have a substantial presence right in Florida itself (as well in many other states), through joint US-Canada defense and security arrangements. For instance, Americans and Canadians work together at the major NORAD (North American Aerospace Defense Command) facility at Tyndall Air Force Base in the Florida Panhandle. Susan mentioned that a Canadian was actually in charge there when the 9/11 attacks struck, and so he was responsible for the defense of US air space.

Susan was vehement in expressing her feelings about the steel and aluminum tariffs:

“Canadians find it insulting to be considered a national security risk to Americans, given our history and our current situation. You know, we’re people; we’re hurt by this. Secondly, we consider it an illegal application of tariffs; it’s an illegal tax. Canada has had to retaliate in an equal amount. This has been very bad for US business, and obviously it’s bad for Canadian business. But it’s bad for US business, and now we’re seeing some of the implications.”

She added: “The Manufacturing Association of Florida has come out very vocally against these tariffs.”

She summarized the economic argument by saying, “We build things together”; and she gave us an amusing but instructive example: The Canada-Florida Burger, comprising a baked bun and ketchup from Ontario and beef from Alberta, married with onions, mushrooms, tomatoes, and lettuce from Florida.

You can view my full interview with Susan Harper at this link or embedded below: https://youtu.be/_jwOOIUmSV4. Her presentation slidedeck is available here as a PDF: https://www.cumber.com/pdf/Susan-Harper-Canada-Conversation.pdf.


 

Thank you, Susan, for making the trip and for your presentation of facts critical to our understanding of our vitally important relationship with Canada.

We again thank the cosponsors and many supporters of our annual Financial Markets and the Economy – Financial Literacy Day. Our partners for the event were USFSM, the Financial Planning Association of Florida (FPA), and the Global Interdependence Center (GIC). You can learn about upcoming activities of GIC here: https://www.interdependence.org/events/.


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Geopolitical Risks in Emerging Market Equity ETFs

Last week included several dramatic examples of unexpected geopolitical developments in emerging markets: Two nuclear powers in South Asia, India, and Pakistan, clashed and appeared to be on the brink of full-scale war; and the US-North Korea summit in Hanoi ended badly, with Trump walking out.

Market Commentary - Cumberland Advisors - Geopolitical Risks in Emerging Market Equity ETFs

Also, unsettling markets were some negative signs about the state of US-China trade negotiations which, later in the week, were offset by some positive signs. With country-specific emerging-market equity ETFs, the risk of such geopolitical shocks is always present. It is interesting to look at how the respective national equity markets reacted to last week’s developments.

The India-Pakistan clash intensified last Tuesday, February 27, when Indian warplanes dropped bombs on a suspected terrorist camp inside Pakistan in response to a deadly terrorist attack on Indian soldiers earlier. Pakistan shot down at least one Indian plane and captured the pilot. Artillery barrages across the border followed, and thousands of troops converged. Pakistan Prime Minister Imran Khan then announced on Thursday that his country would release the captured Indian pilot, “In our desire of peace … and as a first step to open negotiations.” This move appeared to calm matters for the moment, but the situation remains tense. India’s stock market dropped sharply at first but later recovered as the situation eased. The iShares MSCI India ETF, INDA, finished the week up 0.4%. Clearly, should fighting resume, the market would tumble.

The long-standing India-Pakistan dispute over Kashmir is one of the most dangerous geopolitical risks. This clash is a reminder to investors that this risk should not be ignored. Indian stocks have been trending downward for fundamental economic reasons. Economic growth slowed to 6.6% in the fourth quarter of last year from 7% in the third quarter, which in turn was slower than the second quarter’s 8% growth rate. The ETF INDA is down 5% for the last twelve months ending March 1st and is down 2.3% year-to-date. Other emerging markets were also down last year. However, unlike Indian equities, most other emerging markets have rallied so far this year. The iShares MSCI Emerging Markets ETF, EEM, is up 8.8% year-to-date. Our International and Global ETF Portfolios are overweight in emerging markets, but we are not holding any India-specific positions.

The unpredictable North Korean regime and its nuclear capabilities constitute another dangerous geopolitical risk overhanging markets, particularly that of South Korea. The failure of the Hanoi summit appears to have resulted from inadequate preparations at a lower level and failure to recognize that the very complex and difficult issue of denuclearization could not be settled prematurely by a “deal” between two heads of state. There now is the risk that, following this humiliation for Kim, he will respond by moving to add to North Korea’s nuclear capabilities. Hopefully, seasoned diplomats on both sides will seek to restore the negotiations.

As was the case for India, South Korea’s stock market dropped in response to the bad news, with the iShares MSI South Korea Capped ETF, EWY, losing 2.2% over the week. But unlike the case for Indian stocks, the South Korean market has participated in the emerging-market rally so far this year. Despite last week’s losses, EWY is up 7.12% year-to-date as of March 1st. We are maintaining our South Korea positions in our International and Global Portfolios, while monitoring further developments closely.

The South Korean economy is strong, with close ties to the US economy. It is quite advanced and is considered by many to no longer be an emerging-market economy. The Korean equity market is large, accounting for 14% of the iShares MSCI Emerging Markets ETF, EEM, and is exceeded only by Hong Kong’s 23% share. China’s share in EEM is only 8%, but that does not yet include most of the Mainland China stocks. South Korea’s equity market is heavily weighted (40%) with technology stocks. Samsung Electronics alone accounts for 23% of the holdings. Long-term investors in South Korea’s equity market using EWY have done well: The annualized total return over the past 10 years is 12.37%.

Last week was also a volatile one for Chinese stocks, which lurched down and back up with each press comment and tweet hinting at the state of US-China trade talks or the severity of the moderation in the growth of China’s economy. In the end, the broad-based iShares MSCI China ETF, MCHI, was little changed for the week, with an increase of 0.5%.

There was a definite plus for Chinese stocks announced before the market opened on March 1st. The index publisher MSCI announced that it will quadruple the weight of Mainland China shares in its benchmarks. The benchmarks are the basis of many ETFs and funds. It is estimated that this quadrupling will lead to new passive inflows into Mainland China’s stock markets of some $US 80 billion. Chinese equities are also participating in the emerging-market recovery. MCHI is up over 16% year-to-date.

Investors who wish to limit exposure to the country-specific risks inherent in emerging-market stocks can invest in highly diversified ETFs that include stocks from a number of national markets. Two good examples are the ETFs EEM, mentioned above, and the Vanguard FTSE Emerging Markets Index Fund, VWO. Investors in individual-country ETFs need to monitor developments closely and seek to separate the noise in the daily news flow from developments that signal meaningful and lasting changes in the prospects for a market. Often events that capture the headlines for several days or more have little lasting market impact. At Cumberland Advisors we sort key signals from the noise by bringing together fundamental economic and financial analysis, technical market analysis, and geopolitical expertise.

William Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio


Exchange traded funds may not correlate to designated indices and have additional fees and expenses, including the duplication of management fees.
 


Sources: Financial Times, Wall Street Journal, CNBC.com, ETF.com


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Considering China

China stocks surged Monday following Trump’s announcement that he will be delaying US tariffs on China. Prospects for a trade agreement between China and the US are now looking very good. It is evident that both sides need a positive resolution and are willing to compromise. Last year, China’s stock markets experienced their worst year since 2008, with the Shanghai composite dropping 24.6% and the Shenzhen composite tumbling over 33%. These markets appeared to bottom at year end and staged a strong recovery as trade tensions began to ease. This recovery is likely to continue if indeed a trade deal is reached.

The other main cause of last year’s plunge in China’s stock market was increasing signs of a slowdown in China’s economy, paired with uncertainty about the severity of the downshift. It has now become clearer that the slowdown is real but moderate, in contrast to the more dire predictions of some commentators. GDP growth is easing from 6.6% last year to 6.2% this year. In 2020, the economy is projected to expand at a similar and still very robust pace, thanks in part to the anticipated ample policy stimulus and easing of trade tensions.

As Morgan Stanley has noted, China is steadily advancing towards high-income status and a current account deficit that implies the necessity of substantially higher capital inflows. That prospect should encourage further opening up of the economy. Another technical factor that will cause passive investment inflows is MSCI’s plans to increase China A-shares weights in its EM index this year and more in future years. Similarly, FTSE Russell plans to increase the weight of China A-shares in its FTSE Emerging Index.

Changes in the structure of the Chinese economy provide some promising opportunities for investors. The economic slowdown has been mainly in the manufacturing sector, which used to be considered the most important part of the Chinese economy. According to Caixin Purchasing Managers Index data reported by Markit, while manufacturing companies’ output declined modestly in January, service-sector activity continued to expand “solidly,” with the result that the Caixin China Composite PMI for January signaled higher activity for the thirty-fifth month in a row.

It is important to note that China’s services sector became a more important contributor to GDP than its industrial sector in 2013. It has steadily outgrown the industrial sector ever since. The fact that China has already changed into a services/domestic consumption-based economy is not widely recognized.

The Chinese consumer is breaking records. Total Chinese retail sales, which surpassed US retail sales for the first time in 2017, rose a further 9% in 2018 to about US$6.3 trillion. According to 2017 figures cited by KraneShares, Chinese web sales, at US$1.14 trillion, accounted for 19.6% of total Chinese retail sales, whereas US retail web sales, at US$453.5 billion, accounted for just 8.9% of US retail sales. And there is still substantial room for China’s internet population, which is currently less than 60 % of the total population, to grow.

Investors now have 46 US-listed ETFs for Chinese stocks, excluding those ETFs using leverage. Many of these still have limited assets under management (AUM), which implies limited liquidity. There are just 10 that have AUM of at least US$100 million: FXI, MCHI, KWEB, GXC, ASHR, CQQQ, KBA, PGJ, CHIQ, and CXSE.

The largest China ETF, the iShares Large-Cap, FXI, invests in 50 large-cap China stocks traded in Hong Kong, with a heavy concentration of financials, particularly state-run banks. It is up 15.20% year-to-date February 25. The second and fourth largest Chinese ETFs invest in the “total market” (not including A-shares) with a tilt towards financial and technical firms. The iShares MSCI China ETF, MCHI, has gained 17.92% year-to-date. Similarly, the SPDR S&P China ETF, GXC, is up 17.56%.

The third largest China ETF takes a more direct aim at the Chinese consumer and internet web sales. KraneShares CSI China Internet ETF, KWEB, has gained 26.19% year-to-date. This ETF tracks only overseas-listed Chinese shares of internet-sector companies, primarily US-listed N-shares. Also of possible interest is the Investco China Technology ETF, CQQQ, which holds a broad range of technology companies, including US-listed shares. CQQQ has also outperformed this year, gaining 24.31% year-to-date.

Investors considering adding China-specific ETFs should take account of the China exposure they may already have in more aggregate ETFs. For example, the iShares MSCI Emerging Markets ETF, EEM, includes China stocks with a weight of 10.6% and Hong Kong stocks with a weight of 23.15%. Also, China ETFs have historically been subject to wide swings, and the relatively high volatility is likely to continue.

 

William Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio


Sources: Morgan Stanley Research, KraneShares, Caixin, HIS Markit, CNBC, ETF.com, IMF


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

 




Cumberland Chair David Kotok (Podcast)

Have you ever wanted to know more about the people who shape markets and business?

P+L co-host Lisa Abramowicz sits down with Cumberland Advisors Co-Founder David Kotok to talk about his career path, stand out moments, and the advice he gives current students in business school.

Running time 07:27

LISTEN HERE: Bloomberg Radio

NOTE: Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




The Fed Is Guessing As it Plays With Fire: David Kotok (Radio)

David Kotok, Chairman & Chief Investment Officer of Cumberland Advisors, on what to expect from the FOMC, balance sheet, and the outlook for bonds and markets. Hosted by Abramowicz and Paul Sweeney.

Running time 12:42

 

LISTEN HERE: Bloomberg Radio

NOTE: Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.


If you like podcasts, check out this one from 2015 featuring David Kotok talking about his background and Camp Kotok with Barry Ritholtz. They also talk about the history of Cumberland Advisors since its founding, and delve into fundamental principles of investing and valuation.


Links here
https://itunes.apple.com/us/podcast/masters-in-business/id730188152?mt=2

And here
http://www.bloomberg.com/podcasts/masters-in-business/




European Growth Concerns Deepen

The latest economic indicators reveal that the economic slowdown in Europe persists. President Draghi of the European Central Bank (ECB) has underlined the continued weakness, expectations for softer near-term growth, and downside risks. The International Monetary Fund (IMF) has lowered its economic projections for the euro area. Political uncertainties in Europe add to the headwinds affecting investor sentiment.

 Cumberland Advisors Market Commentary by Bill Witherell, Ph.D.

The HIS Markit Flash Euro Area Composite Purchasing Managers’ Index (PMI) , which combines manufacturing and service sector data, fell to 50.7 for January, following a reading of 51.7 in December. The January mark was significantly weaker than the consensus expectation of 51.4. The moderation in the euro area’s economic growth, which began a year ago, is continuing in the first quarter of 2019.

The Flash Composite PMI for France fell unexpectedly to 47.9 because a sharp drop in the services component more than offset a pick-up in the manufacturing component. Conversely, the Flash Composite PMI for Germany recovered slightly to 52.1, following a 66-month low of 51.6 in December. A further decline in the manufacturing component was offset by a stronger performance in the services sector. Adding in the other euro area economies, we observe overall declines in both manufacturing and services PMIs for the region. Manufacturing new orders as well as services incoming new business fell in January.

The IMF, in the quarterly update of its World Economic Outlook, lowered its projection of economic growth in the euro area to 1.6% in 2019. Last fall, their projection was for 1.9% growth. They continue to expect 1.7% growth in 2020. Subdued external demand due to a projected global growth slowdown is one reason for this weaker outlook for the euro area, particularly for Germany. The IMF cites some country-specific factors affecting the near-term outlook: revised auto emission standards in Germany, weak domestic demand and higher borrowing costs in Italy, and demonstrations and strikes in France.

The ECB Governing Council at its January meeting also warned that near-term growth prospects have softened. While markets will have to wait until the Bank’s March meeting for new economic projections, the risk assessment guidance has “moved to the downside.” Mario Draghi, ECB president, said, “We were unanimous about acknowledging the weaker momentum and changing the balance of risk for growth.” The Governing Council cited the continuing uncertainties of Brexit and trade disputes as important downside risks for the region. While the ECB did not announce any change in policy, market expectations for a rate increase later in the year have weakened. On the other hand, a new round of long-term refinancing operations (TLTROs) is looking more likely.

Euro area equity markets have joined in the global equity market recovery in January but are down significantly over the past 12 months. The iShares MSCI Eurozone ETF, EZU, is up 6.0% year-to-date January 25 but is still down 20.5% over the last 12 months. Similarly, the iShares MSCI Germany ETF, EWG, is up 6.3% year-to-date but down 23.7% over the past 12 months. The iShares MSCI France ETF, EWQ, is up 4.1% year-to-date and down 17.2% over the past 12 months. In these and the other euro area markets, the moderation in the euro area’s economic growth appears to be largely priced in. Also, several of the negative factors are likely to prove transitory, including the new emission standards in Germany and the demonstrations in France. While the uncertainties relating to Brexit remain high, the tail risk of a hard or no-deal break of the UK from Europe appears to have been substantially reduced. Positive developments with respect to Brexit and/or an easing of trade disputes with the US would certainly be welcomed by investors. We remain cautious with respect to the euro area in our International and Global portfolios, monitoring developments closely.

William Witherell, Ph.D.
Chief Global Economist
Email | Bio


Sources: Financial Times, Markit Economics, International Monetary Fund, Goldman Sachs Research, BBH Global Currency Strategy


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.

 




China Slowdown and Financial Markets

The Shanghai Stock Exchange was the worst performing major stock market in 2018, with the benchmark Shanghai Composite Index falling 25% over the course of the year. Concerns about a slowing economy deepened in the second half as current indicators surprised on the downside. While many economists cautioned that a major slowdown in China was not likely, much less a recession, investor, domestic consumer, and business sentiment have all clearly worsened.

 Cumberland Advisors Market Commentary by Bill Witherell, Ph.D.

As discussed below, our base-case expectation is that the slowdown will prove to be modest, with the pace of economic activity beginning to pick up in the second quarter of 2019. Risks to this outlook, however, are mainly on the downside.

The Chinese economy clearly did slow during the second half of 2018. GDP growth eased to a 6.5% annual rate in Q3, the slowest growth since early 2009, and looks likely to have moderated further to a 6.3% pace in Q4. Estimated economic growth for the year is 6.6%, moderately slower than the 6.9% rate for 2017, but still relatively robust.

Data releases in the fourth quarter intensified concerns about the likely magnitude and duration of the slowdown. The Caixin China General Manufacturing Index for December weakened in December to 49.7, its lowest level since May 2017. Note that 50 is the reading that separates expansion from contraction. New orders fell marginally, and domestic demand weakened. More positive data was reported several days later but got limited attention. The Caixin China General Services PMI for December registered a solid upturn in services activity, achieving a six-month high. This resulted in a five-month high in overall business activity, combing manufacturing and services, in December. Also ending the year on a positive but still subdued note, business sentiment improved in both the manufacturing and services sectors.

The leading cause of China’s economic slowdown appears to be a serious liquidity crunch that falls most heavily on small, privately owned companies. These firms contribute some 60% of GPD growth and 90% of new jobs. Government policies unintentionally led to these liquidity problems. Back in mid-2016, China’s economic policy switched from stimulus to restraint in response to concerns about a rapid buildup of unregulated shadow-bank lending, often to risky borrowers. Restrictions were placed on shadow banking with the laudable objective of enhancing financial stability. These measures tended to cause funding problems for smaller firms and also for infrastructure projects, while state-owned enterprises continued to have preferential access to bank loans.

China’s central bank has recognized this problem and is moving in a determined way to pump increased liquidity into the economy. It announced last week a $117 billion reduction in required bank reserves. Also, the government urged China’s three largest commercial banks to boost their lending to small privately owned businesses. At a meeting in early December, China’s economic policy officials signaled that tax cuts and increased fiscal spending would be coming this year. Last week, Premier Li repeated these intentions for strengthened countercyclical adjustments in macroeconomic policy, including further monetary policy easing.

This policy switch back to stimulus should be sufficient to counter the credit crunch and is the main reason that we expect the weakening trend in the economy to end in the first quarter, followed by modest strengthening in the remaining three quarters of 2019. Growth for the year 2019 is projected at 6.3%. A critical assumption underlying this relatively sanguine outlook is that the US-China trade negotiations progress constructively. Nothing is certain, but both sides have a strong interest in reaching positive outcomes, probably in a sequence of steps that will take considerable time to achieve.

The trade conflict does not appear to have had a great impact on China’s exports in the closing quarter of 2018, as traders front-loaded shipments before the year-end deadline. But the US-China trade war has negatively affected market sentiment in China and around the globe, stoking fears of a more substantial economic slowdown in China and other countries, particularly in Asia. And the slowdown of the globe’s second largest economy from 6.9% in 2017 to an estimated 6.3% in 2019 will have significant effects on other economies and product markets.

Another possible headwind that has picked up recently is China-Taiwan relations. China’s president Xi Jinping last week asserted China’s right to use military force against “foreign powers” that intervene on the issue of self-rule for Taiwan. This pushback followed President Trump’s signing a law providing US arm sales and high-level visits to Taiwan. This issue risks making the trade negotiations much more difficult or even impossible if all parties are not very prudent.

In sum, investors do have reasons to be cautious about China’s stocks. With last year’s substantial correction and prospects for an early end to the current modest slowdown in China’s rapidly growing economy, valuations do look attractive. If the trade negotiations appear to moving in a positive direction, markets will surely respond favorably. But there will remain significant risks. Chinese stocks historically have been volatile, and that volatility is likely to continue.

William Witherell, Ph.D.
Chief Global Economist
Email | Bio


Sources: Financial Times, Markit Economics, Barclays Research, Geopolitical Futures, OECD


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