Cumberland Advisors Market Commentary – China and Wall Street – Decoupling or Linking?

For at least three decades, under both Republican and Democratic administrations, the United States has urged China to open up its financial markets to foreign capital and foreign financial firms. However, as part of a broader strategy to decouple relationships with China, President Donald Trump’s administration appears to want global financial firms to pull back from China.

China and Wall Street – Decoupling or Linking by William Witherell, Ph.D

This policy reversal comes at a time when China has recently made sweeping reforms to liberalize its financial market, including removing ownership on foreign financial services companies operating in China and allowing MasterCard and PayPal to enter its payment industry and Blackrock to sell its own mutual funds in China. Under President Xi Jinping, China is pressing forward with a “linking” strategy to develop increased connections with foreign financial companies. China wishes to attract increased capital inflows and to develop their bond, pensions, and insurance markets. Chinese policymakers see benefits from having domestic financial firms gain greater exposure to major Western firms. US financial firms and US investors are clearly demonstrating that they support closer, mutually beneficial relations between the US and Chinese financial markets.

The tension between the incompatible objectives of “decoupling” and “linking,” voiced in public statements made by the leaders of the world’s two largest economies, leads to fears that a financial and capital market estrangement is developing that will have negative effects for both nations. Increased competition between Wall Street, Chinese, and other financial centers is to be expected and welcomed. Developments to date, however, suggest that the two countries may avoid seeing financial relations deteriorate to the extent that relations in trade and technology have. The substantial mutual benefits to the US and China and to global financial stability from avoiding such a breakdown in relations must be apparent to policy officials.

Despite the tough political rhetoric, the financial measures taken by the US thus far against China have been limited. Mainly, the US has blocked a federal government pension plan from investing in Chinese stocks, and the US Senate has passed a bill that threatens to delist Chinese firms from US stock exchanges if they don’t meet requirements. As the government pension plan accounts for just 3% of America’s pension assets, the effect on the flow of US investments into China’s equity markets is insignificant.

The Chinese equity market has recovered strongly this year. The CSI 300 Index, which covers the top 300 stocks traded on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, is up some 17% this year. The S&P China BMI Index, which covers the investible universe of publicly traded companies domiciled in China but legally available to foreign investors, is up some 23%. In comparison, the S&P 500 is up 10.3% year-to-date. The inflow of global funds into the two Mainland China markets this year has topped $26 billion.

The Senate bill, the Holding Foreign Companies Accountable Act, prohibits the securities of any company from being listed on a US securities exchange if the company fails to comply with the Public Company Accounting Oversight Board (PCAOB)’s audit for three years in a row. The bill also requires public companies to disclose whether they are owned by a foreign government. The political statements made by Senators and others when this bill was considered and passed must have concerned Chinese firms, but the bill’s impact may be limited. Most private (i.e. non-state-owned) Chinese firms will likely arrange within the time limit to meet the PCAOB standards that all US-listed firms are required to meet. There are reports that a compromise for Chinese firms is under consideration. The attractions of listing in the US will continue to be strong: namely, better analyst coverage, deeper liquidity, and higher trading volume. The number of Chinese firms listed in the US is 220, an increase over the past year of more than 25%.

The fact that the Ant Group’s IPO, which may be the largest in history, is expected to be listed in Shanghai and Hong Kong, bypassing the United States, is understandably viewed with some concern by Wall Street. A successful offering of $30 billion or more will demonstrate the capability of these markets and may lead other Chinese firms to follow Ant’s example, possibly with urging from the Chinese government. But the Ant Group is an exceptionally attractive company. On October 16 it raised the valuation target for its IPO to $280 billion. Ant views its core activity as a facilitator of e-commerce and innovative financial services. In 2019, Ant handled over 50% of China’s $8 trillion digital payments market. The attractions cited above of listing in the United States will remain powerful as long as the US does not take further actions against listed Chinese firms.

Major US financial firms are not hesitating to take advantage of the reforms of China’s foreign-ownership and market-access regulations, despite Washington’s decoupling objectives. JP Morgan is completing a $1 billion buyout of its joint-venture asset-management partner and is also taking control of its Chinese securities and futures joint ventures. These actions should make JP Morgan the first major fully foreign-owned investment bank operating in China. Goldman Sachs and Morgan Stanley have taken majority control of their Chinese securities ventures, and Citi has been authorized to serve institutional investors as the first US custody bank in China. Vanguard is shifting its Asian headquarters to Shanghai.

US institutional investors have just demonstrated their support for a continued strong linkage between the US and Chinese financial markets by ordering more than $27 billion in response to China’s first bond offer made directly to US buyers. The bond offer was for $6 billion, and the yield on the 10-year component was about 0.5 percentage points above the equivalent US Treasury. The huge China onshore bond market is estimated as the second largest globally. In contrast, the China offshore market is now small but has huge potential, as the bond sale to US investors suggests. Participating in and helping to develop these markets together with the Chinese pensions and insurance markets will become important for US financial firms.

Tensions in the relations between the United States and China will continue whatever the outcome of the elections in the US. Both sides need to dial back the rhetoric and avoid further missteps toward a new cold war and increasing military tensions. Further moves in the direction of isolationism and protectionism by the United States will continue to be counterproductive.

It is fortunate that financial relations between the US and China have not broken down in substance. Both sides have much to gain from continuing the détente that has been hard won over years. China desires continued access to US capital and to the positive contributions US firms can make to the development of its markets. As the Chinese economy continues to grow strongly and to become the globe’s largest, its financial markets will continue to grow and mature. Opportunities for US firms to earn asset management fees and securities revenue will be huge. Also, US financial firms can learn from the advances China is making in digital payments. More importantly, including China in the current global monetary system is far preferable to giving incentives to China to develop a parallel global payments system.

Cumberland Advisors is continuing to have overweight China positions in its International and Global Equity ETF Portfolios.

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


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Cumberland Advisors Market Commentary – International Equity ETF Q3 Overview and Outlook

The global economy is expected to have registered a stronger than anticipated rebound in the third quarter with record-breaking growth rates after output collapsed in the first half of the because of the COVID-19 pandemic.

Market Commentary - Cumberland Advisors -  William 'Bill' Witherell - International Equity ETF Q3 Overview and Outlook

The reopening of businesses and the easing of lockdowns and other restrictions in many countries allowed the rapid pickup in output in the early stages of the quarter. Prompt, substantial fiscal and monetary support in most economies, including furlough schemes, jobless benefits, and very easy financial conditions, helped to limit the impact on household incomes and companies and to preserve confidence. Global manufacturing and world goods trade have led the recovery, while services, particularly those requiring social interaction, continue to be strongly affected.

Apart from the trend seen in the Chinese economy and several other Asian economies, the pace of the recovery has faded through the quarter. Some slowdown was expected after the reopening process in the manufacturing sectors was completed. The concerning development is the significant surge in COVID-19 cases in many countries, particularly in Europe, prompting a retightening of restrictions. In some emerging markets the first wave of infections continues to grow. India appears to be experiencing the most rapid spread of the virus. In Latin America, Brazil has the largest number of deaths, and Argentina has sharply rising infections. Europe, Israel, Australia, Canada, and South Korea have all experienced a second wave of cases. Overall, there now are more than 32 million cases in 188 countries and a death toll of around one million. Improvements in treatment and the growing prospect of successful vaccines becoming widely available in 2021 are positive factors going forward.

Being the first to be hit by the pandemic and the first to emerge following a relatively successful curbing of the outbreak, China is the only major economy likely to be able to register a positive growth rate for the current year (+2%). The solid recovery in the world’s second largest economy and its growing demand for imports of both products and raw materials is important for many other economies, particularly those in the region, including South Korea, Taiwan, and Japan.

The pace of the economic recovery in Europe has plateaued towards the end of the quarter, with a second wave of COVID-19 infections occurring with varying strength across the region, hitting Spain, France, and the UK much harder than Germany and Italy. Government policy support has been ample. The largest European economy, that of Germany, has had the strongest economic performance in the quarter. Japan’s economic recovery in the third quarter was more modest than Europe’s, in part because its decline in the second quarter was smaller. It has begun to ease restrictions following a reduction in virus infections. The new prime minister, former Chief Cabinet Secretary Suga, is expected to continue current policies with a strong commitment to pursue the economic reform agenda focusing on improving productivity.

Looking forward to the future, investors are faced with considerable uncertainties about the future course of the pandemic, US election results, and the outcome of the UK/EU negotiations on the exit of the UK from the EU (Brexit). The slowdown in the global recovery will lead to much lower GNP growth rates in the final quarter of this year and into 2021, again except for China and several other Asian economies. The OECD is projecting global GDP growth in 2021 at 5.0%, following a 4.5% decline in the current year.

International equity markets advanced robustly in the first two months of the quarter and then retreated in September, registering about a 6.3% total return gain for the quarter as measured by the MSCI ACWX ex USA Index. Very low interest rates and stimulative fiscal policies are underpinning these markets. Advanced-economy markets outside of North America averaged a gain of 4.8%; but Germany, Sweden, Netherlands, and Japan gained 6.5% or more, as did Canada. Emerging markets averaged about a 9.6% gain, with this figure driven mainly by even stronger returns by China and several other Asian markets (Taiwan, South Korea, and India). In contrast, Latin American markets averaged a declined over the quarter despite a 5.5% gain for Mexico.

We were fortunate to have almost all of the positions in our International Equity ETF portfolio in strongly performing Asian and European markets and Canada and a modest cash position in the third quarter. Going forward, identifying the markets most likely to outperform and monitoring the mentioned downside risks will continue to be very important.

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

___________________________________________________________________
Sources: OECD, Oxford Economics, etf.com, Barclays Economic Research


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Cumberland Advisors Market Commentary – UK Facing Virus Second Wave and Brexit Deadline

United Kingdom stocks are underperforming the Eurozone markets as the nation faces the double challenges of an upsurge in virus infections and time running out in the deadlocked negotiations with the EU on Brexit.

Market Commentary - Cumberland Advisors - UK Facing Virus Second Wave and Brexit Deadline
Over the past three months through September 24, the iShares MSCI United Kingdom ETF, EWU, lost 5.0% on a total return basis and is down 25.3% year-to-date, whereas the corresponding returns for iShares MSCI Eurozone ETF, EZU, are a slight gain of 0.5% the past three months and a loss of 5.37% YTD.

The United Kingdom has nearly 400,000 confirmed COVID-19 cases, and officials have observed that the actual number is probably considerably higher. A definite second wave of new cases began in early August, with the number of cases now doubling every seven days. Prime Minister Boris Johnson has recognized that the country has “reached a perilous turning point.” New and tightened restrictions on social gatherings and pub and restaurant hours and extended mandatory face-covering requirements for England were announced on September 22. Scotland went further, to ban most household visits. A threatened broader lockdown is being avoided, but persons who can work from home are now encouraged to do so. That recommendation reverses the previous government encouragement for workers to get back to their workplaces. The objective is to check the growth in new infections while avoiding the negative economic effects that would result from a lockdown.

There surely will be a significant impact on hospitality businesses, tourism, and airlines, affecting employment and consumer and business attitudes. The government indicated that the restrictions are likely to remain in effect for the next six months and threatened stricter measures if the infection surge continues. The opposition Labour Party leader Keir Starmer agreed that the measures are needed in view of the spurt in new cases, but he underlined the failure of the government to meet the demands for coronavirus testing and tracking. The Johnson government has also been criticized for locking down the economy later in March than did many European governments.

The Brexit negotiations also suffered a reversal when the UK government published the Internal Market Bill on September 9. This bill would overwrite parts of the Withdrawal Agreement, which is an international treaty. Such a unilateral overwriting would clearly be a breach of international law, a fact that the UK government acknowledges. The bill gives to British ministers the unilateral power to determine if goods moving from Great Britain to Northern Ireland are at risk of going to the Irish Republic. Under the Internal Market Bill the UK government would also have the unilateral power to decide whether to inform the EU about state aid that affects firms operating in Northern Ireland. This provision would open the possibility of UK public subsidies undercutting EU firms, a strong EU concern.

This bill faces strong opposition within the UK, including within the Conservative Party and among all living former prime ministers, because the government is brazenly admitting a willingness to breach international law, and in a way that risks undermining the Good Friday peace process. In the US, Biden, the White House, and congressional leaders have all indicated they would not back a free trade agreement with the UK if the Northern Ireland peace process is threatened. The government has had to modify the bill so that ministers would have to get the approval of the House of Commons before using the powers in the bill to override the Withdrawal Agreement. This modification permitted a positive first vote on the bill in Parliament.

The EU has given the UK an end-of-September deadline to abandon the Internal Market Bill, or the EU will take legal action. Johnson rejected that threat and set a mid-October deadline for a Brexit agreement to be struck. That deadline coincides with the EU’s October 15–16 summit. It is possible that the bill is a tactical ploy to ratchet up pressure on the EU; but, if so, the risk of miscalculation appears to be high. The provisions relating to the Irish border and maintaining Irish peace are central to the Withdrawal Agreement. Aside from this complication, the Brexit negotiations are deadlocked on the state-aid rules that the EU wants the UK to follow and on access to British fishing waters.

It is possible that a last-minute trade deal will be reached, as both sides will suffer economically if the UK exits the EU at year-end without an agreement. UK exports to the EU would become less competitive as the EU would impose tariffs and quotas and customs delays at the boarder are likely to be onerous. Reports indicate some positive developments in the latest negotiations. While the risk of a no-deal Brexit remains significant, the latest more optimistic rumors are affecting market sentiment.

The financial sector is adjusting to the possibility of a no-deal Brexit. For example, JPMorgan Chase has told about 200 of its staff in London to move to continental European cities – Paris, Frankfort, Milan, and Madrid. The bank is also moving assets worth some 200 billion euros to Frankfort, a move that will make it one of the largest banks in Germany. This move will be welcomed by the EU, which is seeking to boost its own underdeveloped capital markets and reduce its reliance on London. The British revealing a willingness to breach international law will further weaken the EU’s readiness to offer financial market access (equivalence) to the UK after Britain exits the EU. The EU Commission intends shortly to announce its plans to bring closer together Europe’s disparate markets, and those plans include steps to unify supervisory standards across Europe.
The recovery in the UK economy is slowing as COVID restrictions continue to be a headwind. Also, the scope for catch-up growth is now limited, since most previously closed firms have reopened. The flash HIS Market Composite Index for September fell to a three-month low at 55.7, while still indicating a positive rate of expansion. Both manufacturing and services registered weaker rates of expansion. There were numerous reports of a lack of consumer confidence and reports of COVID-related supply chain disruptions.
Job cuts continue, and the announced ending of the job furlough scheme looks very likely to see unemployment rise sharply. The government is seeking to offset to some extent the end of the furlough scheme on October 31 with a more limited and less generous Job Support Scheme that will extend for six months as part of a “winter economic plan”.

The economic recovery may well continue to slow down in the next few months and even further should COVID cases continue to rise sharply and lockdowns need to be re-imposed. The outlook for 2021 is highly uncertain. It is dependent on the outcome of the Brexit negotiations and even more on whether and when there is a successful widespread dissemination of a COVID-19 vaccine. Even under optimistic assumptions, UK GDP is still likely to be beneath pre-virus levels at the beginning of 2022, as will be the case for most economies.

Neither of the ETFs mentioned in this note are held in Cumberland Advisors investment accounts nor in the investments of the author.

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

_____________________________________________________________

Sources: Financial Times, OECD, Oxford Economics, Barclays Research, The Economist, Bloomberg, IHA Markit, etc.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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Cumberland Advisors Market Commentary – The Second Wave of COVID-19 Confronts Western Europe

The rebound in the European economies following the sharp fall in March and April is threatened by a second wave of COVID-19 cases. As a result of vacation travel and an easing of restrictions, case growth in Western Europe has returned to levels last seen in May, with 1,094,194 confirmed cases as of the end of August.

CA-Market-Commentary-The Second Wave of COVID-19 Confronts Western Europe

While disturbing, this statistic remains less than a third of the figure for the United States: 3,686,513. The Europeans did a far better job dealing with the first wave of the pandemic, which should make the second wave easier to manage. Also, recent cases are much younger on average than the cases in the first wave were, and hospitalizations have been far fewer. Thus, there should be less of a need for widespread lockdowns that would severely impact European economies.

It is the services sector that is likely to bear the brunt of new restrictions. The second wave of COVID-19 appears to have brought the services sector of the Eurozone almost to a halt in August. The Markit Eurozone Services PMI measure of services sector business activity for August declined from July’s robust 54.7 reading to just 50.5 which is close to the no-change level of 50.0. This decline reflects new restrictions on gatherings and movements, along with mask regulations, primarily at the local and regional levels, in response to rising infections, which have also affected consumer attitudes.

The Markit Eurozone Manufacturing PMI for August, 51.7, maintained the strong July reading of 51.8, indicating that industrial production is recovering sharply in the third quarter. Consumer goods production led the way, with the domestic sector being the prime driver. Export orders rose at a subdued pace. Since the services sector heavily outweighs the manufacturing sector, accounting for some 77% of Eurozone GDP, the large decline in the services PMI caused the Composite PMI to fall steeply from 54.9 in July to 51.9 in August. Thus, despite the strength seen in the manufacturing sector, the rebound in the overall Eurozone economy has come very close to stalling. The pressure is great on policymakers to proceed without further delay with announced measures to sustain the recovery, in particular, the EU 750-billion-euro Recovery Fund and seven-year budget plan.

The Eurozone equity markets, as measured by the iShares MSCI Eurozone ETF, EZU, remain down for the year-to-date September 3, by 5.67% on a total-return basis. This figure includes positive year-to-date returns for Germany and the Netherlands, but those have been more than offset by negative returns for France, Spain, Italy, Belgium, Ireland, Austria, and Portugal. Identifying the national markets with the best prospects within the Eurozone will continue to be important.

The latest activity data indicate that the largest Eurozone economy, Germany, and its neighbor the Netherlands have decoupled from Italy and Spain and also, to a lesser extent, from France. The Markit German Manufacturing PMI for August indicated that manufacturing production rose at the fastest rate in two and a half years, with a strong increase in new orders, accelerated growth in export orders, and increased business optimism. A slowdown in services, indicating a loss of momentum in the sector, caused the composite measure of business activity to lose some steam from July’s 55.3, to 54.4. Yet Germany’s August Composite PMI was the strongest in the Eurozone, well above France’s 51.6, Italy’s 49.5, and Spain’s 48.4, the latter two indicating declining business activity.

Germany has suffered less from the pandemic than the other four largest Eurozone economies have, with 251,650 cases and 9,330 deaths by September 4th. The corresponding figures for Spain are 498,989 cases and 29,418 deaths, while France has seen 347,268 cases and 30,730 deaths, and Italy has had 277,634 cases and 35,541 deaths. Nevertheless, Germany is among a number of European countries that are experiencing rising infections following the easing of most lockdown restrictions and the resumption of international travel in July. Germany has paused further easing of restrictions and tightened some existing rules that target infections arising from tourism and festivals and support the safe opening of schools. The objective is to avoid any broad lockdowns of business and society. In a major change to its traditional fiscal policy conservatism, Germany announced in June a 130-billion-euro economic recovery plan that includes direct payments to households and a cut in the value-added tax. Together with the fiscal stimulus to be provided at the European level and the monetary policy stimulus provided by the European Central Bank, the German plan should return the German economy’s growth to a healthy 6% annual pace next year.

The iShares MSCI Germany ETF, EWG, is up 2.8% year-to-date. The neighboring iShares MSCI Netherlands ETF, EWN, is up 4.1%. One factor accounting for this more favorable performance is the combined weight of technology and industrial sectors in these ETFs: 31.7% in EWG and 42.2% in EWN, substantially above their corresponding weights in other Eurozone equity markets. Germany’s and Netherlands’ manufacturing sectors are recovering strongly. Another factor is the relative success of these countries in dealing with the pandemic.

Private sector activity in France fell heavily in August as the Markit Composite PMI dropped to 51.6 in August from July’s robust reading of 57.3%. The Manufacturing PMI fell from 52.4 in July to 49.8 in August, very slightly below the 50.0 figure that indicates no change in the rate of activity. This decline follows moderate improvements in June and July. The decline in the services sector was greater, from 57.3 to 51.5, reflecting a broad stagnation in new business and demand.

France has in recent weeks recorded its highest number of daily COVID-19 cases since the spring, exceeded in Europe only by the spike in Spain. France reported almost 9,000 new cases on September 4th. In part, this figure reflects a dramatic increase in testing. It is estimated that the virus is actively circulating in 20% of France’s regions, where the local authorities have been asked to impose stricter rules on gatherings and movements. Masks are required on the streets of the Paris region and in communal workspaces. Fortunately, hospitalizations remain low, as recent cases are predominantly in younger people.

France’s President Emmanuel Macron has announced a plan to inject 100 billion euros of additional stimulus into France’s economy to boost growth at a time when the recovery is losing momentum and virus infections are rising. This plan, equal to about 4% of France’s GDP, aims at investment and structural reform, including a 20-billion-euro tax cut for French companies, 30 billion euros for reducing carbon emissions, and 35 billion euros for job protection, vocational training, apprenticeships, and hiring subsidies. The emphasis on industrial competitiveness and human capital rather than on demand stimulation should benefit the French economy over the medium and longer term.

France’s equity market was affected sharply by the pandemic and resulting shutdowns in the economy. The iShares MSCI France ETF, EWQ, has been recovering since March but is still down 10.0% year-to-date. If France is able to bring the current outbreak of virus infections under control, French equities should resume their recovery and may be able to reduce the gap between German and French stocks.

Italy’s manufacturing sector has made a dramatic recovery following the severe constraints on Italy’s economy due to the pandemic. In August, the Markit Italy Manufacturing PMI registered the best improvement in activity for over two years, with increases in output and new orders, but foreign orders declined. The encouragement in manufacturing was offset by services’ dropping back into contraction territory, bringing the composite PMI down below 50.0, to 49.5. The economy remains well below pre-COVID levels. Italy has had fewer virus infections but more deaths than Germany, France, and Spain have had. It is responding to the second wave of cases by imposing quarantines on travelers from Spain and Greece, closing nightclubs, and requiring masks between 6 pm and 6 am in public spaces if social distancing cannot be observed. The iShares MSCI Italy ETF, EWI, swooned when the pandemic struck and is still down 13.0% year-to-date.

Spain’s economy has declined in five of the past six months, according to the Markit August Composite PMI. At 48.4 it was at a three-month low, with services declining and manufacturing stagnating. It is not surprising that, as Markit reported, “sectors relating to tourism and social contact are suffering the most.” Spain has the highest count of COVID-19 infections in the Eurozone. The government was slow to act, and some of the messaging from leaders has been mixed. Spain has also had the largest number of second-wave cases, and its economy is likely to recover more slowly than other Eurozone economies as a result. Containment measures currently look very limited. The iShares MSCI Spain ETF, EWP, remains down a striking 20.0% year-to-date.

Cumberland holds the ETFs EWG and EWQ in its International and Global Equity Portfolios. The writer holds none of the ETFs mentioned in his investments.

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


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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Barron’s – Shinzo Abe’s Resignation Could Be an Entry Point for Japanese Stocks, Analysts Say

Excerpt from “Shinzo Abe’s Resignation Could Be an Entry Point for Japanese Stocks, Analysts Say”

By Leslie P. Norton – Aug. 28, 2020

The resignation of Japanese Prime Minister Shinzo Abe, Japan’s longest-serving prime minister, could create an entry point for Japanese equities, analysts said.

Daiju Aoki, regional CIO Japan for UBS Securities, believes Japanese equities could experience volatility, but wrote that he remains “constructive” on stocks as the Bank of Japan keeps buying equity exchange-traded funds.

In an interview, Bill Witherell, chief global economist at Cumberland Advisors, reiterated his bullish view on Japanese stocks despite Japan’s recent report of its worst quarter on record. Japan accounts for around 15% of the firm’s international portfolios, held through iShares MSCI Japan ETF (ticker: EWJ) and through iShares MSCI ACWI ex U.S. (ACWX). “We’re maintaining our position,” on the theory that Abe’s successor will come from the leadership of the ruling Liberal Democratic Party, Witherell said.

Abe became prime minister a year after China overtook Japan as the world’s second-largest economy and 23 years after Japan’s stock market peaked. He lent his name to ‘Abenomics,’ a three-pronged plan to combat deflation and revive Japanese economic growth, including aggressive easing from the Bank of Japan, government spending, and structural reforms. During that time, the Bank of Japan set an inflation target of 2%. But Japan has never managed to reach that, and many of Abe’s projects remained unfinished.

Full article at Barron’s (paywall): https://www.barrons.com/articles/shinzo-abes-resignation-could-be-an-entry-point-for-japanese-stocks-analysts-say-51598656209


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Cumberland Advisors Market Commentary – Japan’s Economy, Stocks, and Corporate Governance

The Japanese economy, the globe’s third largest (following those of the US and China), shrank by a record 7.8% in the second quarter. This decline was less than the 9.5% fall in the US economy and the 10.1% drop in the German economy. However, it was more than double neighboring South Korea’s 3.3% drop. Taiwan’s GDP eased only 0.7%. Japan, like South Korea and Taiwan, was able to avoid strict pandemic lockdowns, but its economy was already in decline the previous two quarters, hit by the US-China trade war and a sales tax increase before COVID-19. In the second quarter, private consumption suffered during a five-week national state of emergency, and at the same time exports dropped sharply due to the decline in the global economy.
 
Market Commentary - Cumberland Advisors - Japan’s Economy, Stocks, and Corporate Governance 
July data indicate the third quarter is also off to a difficult start in Japan. Markit Economics reported that the au Jibun Bank Composite Output Index (manufacturing plus services) for July was 44.9. This is up from June’s 40.8 reading and is the highest since February. Nevertheless, the index’s remaining below the 50.0 no-change mark, as it has for six consecutive months, indicates that the private sector was still declining at the start of the third quarter. Companies reported that weak demand reflected subdued global trade, continued social distancing, and border restrictions. The value of exports in July was down 19.2% compared with the July 2019 figure, which is an improvement over June’s 26.2% yoy decline. Business expectations are for improving activity in the next 12 months. 
 
It now looks like Japanese GDP will contract by 6% in 2020, while the OECD is projecting growth of 2.1% in 2021. The government has implemented measures equal to some 40% of GDP to aid the economy, including job-retention subsidies, loan guaranties, and cash handouts, while the Bank of Japan has been extending cheap loans and purchasing ETFs, commercial paper, and corporate bonds. Further stimulus actions are looking increasingly likely in view of the weakness in the recovery thus far and recent increases in COVID infections.
 
Uncertainty is great concerning future developments in the pandemic and its effects on Japan’s and the global economy. In Japan confirmed cases started to rise significantly in March, accelerated in April, and then appeared to peak. Confinement measures were largely voluntary, including stay-at-home requests. Public schools were closed from mid-March and just reopened August 17. Under a state of emergency, nonessential businesses were closed between mid-April and mid-June. The rate of infections has again been rising in recent weeks, with Tokyo raising its alert to the highest level. Bars must close by 10 PM. Yet these developments in Japan need to be kept in perspective. The nation’s total death toll at the time of writing was just 1,132, despite the very high share of elderly in the population. Japan’s rate of coronavirus deaths per million people is 8.8, compared with 514.9 deaths/million in the US. Also, Japan’s cases/million is 446.8, compared with 16,362/million in the US.
 
Japanese stocks tumbled earlier in the year along with most stock markets as a result of the global pandemic and its effect on economies. Stocks have been recovering since early April. Year-to-date August 18, the iShares MSCI Japan ETF, EWJ, is down 0.8% on a total-return basis. Over the past 12 months, its total return is 11.3%. Over this period, EWJ outperformed the broad iShares MSCI All Countries except US ETF, ACWX, which had corresponding total returns of -3.1% and 9.5%. 
 
While economic growth in Japan is likely to remain modest, Japanese business earnings appear to be improving, with positive surprises predominating. One encouraging factor is the improvement being registered in corporate governance standards, including a rise in the appointment of external directors, a drop in anti-takeover measures, and progress in dismantling the webs of cross-held shares. Japan’s prime minister, Shinzo Abe, included corporate governance reform as one of the most important challenges in his Abenomics growth strategy. A stewardship code was enacted in 2014, followed by Japan’s corporate governance code in 2015. Both were updated three years after enactment. Their objective is to achieve high-quality governance that will yield increasing corporate value and sustainable economic growth. One sign of progress is that the percentage of listed companies that have appointed more than one independent director increased from 21.5% in 2014 to 93.4% in 2019. Cross-shareholdings as a percentage of total market capitalization were well above 30% in the 1990s but now have declined to under 10%. This development should reduce the protection of underperforming management and free locked-up capital that could be more efficiently deployed elsewhere. 
 
The Asian Corporate Governance Association has noted that Japan still has a way to go. Improvements are needed in the process of nomination of directors and in chief executive officer succession. Beneficial shareholder identification is another area needing attention. We believe that strengthening corporate governance over time improves the attractiveness of a company to investors. Cumberland Advisors continues to include Japan in our International and Global portfolios. 
 
Cumberland Advisors holds EWJ and ACWX in its investment portfolios. The author does not hold either of these ETFs in his personal investments.
 
Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio
________________________________________________________________________________
Sources: Financial Times, etf.com, acga-asia.org, kyodonews.net, strategy-business.com, oecd.org, responsible-investor.com, ihsmarkit.com, GS Macro Economics Research


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Cumberland Advisors Market Commentary – Why Investors Are Looking at Taiwan

Consider a place that has had only 476 Covid-19 cases and just 7 deaths. This sounds like a rural town in the US with a small population and good access to medical care. Actually, it is Taiwan, a small country in Asia with a very dense population of 23.6 million people, situated about 100 miles off the coast of the China mainland, where the coronavirus originated. On a per capita basis, the US has had more than 1,200 times as many COVID-19 deaths as Taiwan has. There has been no local transmission there in more than three months. Taiwan’s success in combating this virus is unmatched. It occurred despite the fact that more than one million Taiwanese work in China and there is constant travel between the two nations.
Market Commentary - Cumberland Advisors - Why Investors Are Looking at Taiwan
There are several reasons for Taiwan’s success. The country has learned from its past experiences of having to deal with viruses coming from China, in particular, SARS. The government gave serious attention to planning how to deal with future threats. The population, like those of a number of Asian countries, is used to wearing face masks to limit the spread of disease. But the unique Taiwanese advantage in confronting COVID-19 is the advanced state of the nation’s digital health infrastructure and its readiness to apply it. All citizens have a health card containing their medical history, with a unique ID that is used by all healthcare facilities and doctors. The authorities were able to merge this information with immigration and customs data to identify and test patients most at risk. Taiwan’s testing, tracing, and isolating proved key to checking the spread. No widespread lockdowns were needed. It is important to note the important role played by the country’s democratic norms and institutions. The leadership has demonstrated transparency, honesty, and respect for democratic processes while avoiding politicizing the pandemic.
The Taiwanese economy is benefiting from both its success so far in combating the virus and a $35.9 billion government stimulus program to help offset the headwind from the 4.9% decline projected for the global economy. Consumers started in July to spend government-issued vouchers for consumer goods and tourism, and several weeks ago the government tabled a second supplementary budget for 2020 of $7.13 billion to boost sectors hit by the pandemic. More important than these measures has been the resumption of strong demand for Taiwan’s high-quality telecommunications exports, helped by people around the globe working from home.
Taiwan’s manufacturing downturn in April and May eased in June, with the HIS Markit Taiwan Manufacturing PMI rising to 46.2 from 41.9 in May. In July the PMI moved into expansion territory at 50.6 with output stabilizing. Supply chains are still under pressure and employment continued to decline. Tourism and aviation have been hard hit.
Taiwan’s budget office expects the economy to advance by 1.67% this year, a little slower than the 1.77% gain projected by the Chung-Hua Institution for Economic Research. The Taiwanese economy is classified by the International Monetary Fund as an advanced developed economy. It is looking like Taiwan’s economy will be the only advanced economy to achieve a positive annual rate of growth this year.
Looking beyond 2020, Taiwan looks well situated to take advantage of the projected recovery of the global economy and continued outperformance of the technology sector. Its most important export is semiconductors, an industry key to the accelerating development of 5G technology. China, Taiwan’s most important export market, is expected to expand strongly next year.
Taiwan’s stock market has done better than most national markets so far this year. The iShares MSCI Taiwan ETF, EWT, has recovered from a sharp drop in March and is now up 9.8% year-to-date August 4. In comparison, the iShares MSCI all countries ex-US ETF, ACWX, is still down 6.3%, and the advanced-country ex-US iShares MSCI EAFE ETF, EFA, is down 8.4%. The outperformance of EWT reflects the heavy, 54%, weight of technology stocks in the ETF, with Taiwan Semiconductor Manufacturing Co. accounting for 23.3%. There are several downside risks to monitor. The global economic recovery could be slowed by further outbreaks of the pandemic. China-US relations could deteriorate further, impacting international trade. China could step up its pressure on Taiwan, following its oppressive actions towards Hong Kong. Cumberland Advisors is maintaining its EWT positions in its International and Global ETF portfolios.
Cumberland Advisors holds ACWX in its investment portfolios. The author holds ACWX in his personal investment portfolio.
Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
Email | Bio
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Sources: statnews.com, brookings.edu, Worldometers.com, HIS Markit, reuters.com, forbes.com, cnbc.cometf.com, Financial Times



Cumberland Advisors Market Commentary – Chinese Economy: Global Locomotive but Significant Risks

China’s economy, the second largest in the world after that of the United States, is recovering from a sharp slowdown in the first quarter of the year. The first estimate of the annualized second-quarter GDP growth rate is +3.2% versus 2.4% expected, a strong reversal from -6.8% in the first quarter. The advance indicates that China’s early success in combating the coronavirus, along with positive results from China’s policy stimulus measures, have reversed the drag on the economy.

Market Commentary - Cumberland Advisors - Chinese Economy Global Locomotive but Significant Risks

Early in the year, government spending was increased substantially, in part because of massive public health material and equipment needs. There were also VAT and income tax reductions, accelerated disbursement of unemployment insurance payments, waived social security contributions, and increased public investments. In sum, discretionary fiscal measures equal to 4.1% of GDP were provided in the first half. Looking ahead, significant further infrastructure spending is likely.

On the side of monetary policy, large liquidity injections early in the year were followed by liquidity support measures where needed. The reserve requirement ratio was lowered, as were the interest rate paid on excessive reserves and various policy rates. There were also measures to encourage lending to smaller firms and steps to limit tightening of financial conditions. As a result, credit growth has been robust and will provide a tailwind to industry, construction, and commodity markets in the second half.

Most other recent economic readings are encouraging. China’s Caixin Manufacturing PMI (purchasing managers index) for June reached a six-month high, while the Caixin Services PMI for June indicated that service sector activity (52% of the economy) expanded at the fastest rate for over a decade, as did the Composite Output Index (manufacturing plus services). Industrial production rose 4.8% versus one year ago. All categories of investment improved in June. The unemployment rate improved slightly – 5.7% in June versus 5.9% in May.

On the negative side, while work resumption rates have continued to rise, businesses remain cautious about increasing hiring, despite their optimism about the economic outlook. Also, retail sales in June were down 1.8% compared with a year ago, but that’s an improvement over the -2.8% figure for May. The mid-June flare-up of the pandemic in some parts of China, leading to virus control measures in Beijing, and the continued weak employment situation probably were factors moderating household consumption.

New export business is expanding for the first time in five months. Imports also grew in June, advancing at a 2.7% pace compared to a year ago, bouncing back from a 16.7% decline in May. Imports from the US increased by 11.3%, driven by agricultural goods purchased in accordance with the “phase one” trade deal. Import demand by an expanding Chinese economy is likely to be a tailwind for the global economy in the second half of 2020 and in 2021.

Looking forward, there is higher than usual uncertainty about the future course of the global economy, including the outlook for the Chinese economy. For example, it is evident that China’s economic growth for the current year will be down sharply from last year’s 6.1% advance. But how far down? The OECD is projecting a negative annual growth for China’s GDP for the year 2020 of 2.6% or, if there is a significant second wave of the pandemic, -3.7%. In contrast, the IMF is projecting growth of +1% for 2020. In view of the latest data, we suggest that a significantly stronger second half could result in a full-year reading of 2–3%. Next year, China’s economy may return to a 6.5–7.0% pace, but the downside risks to such a positive outlook should be considered.

Perhaps the greatest uncertainty about the outlook for China’s economy is the future course of the global pandemic. When will the virus that continues to surge in the country with the globe’s largest economy, the United States, be brought under control and at what cost in terms of partial and total shutdowns? Will there be a significant second wave affecting China and economies around the globe? When will an effective vaccine be developed and become widely available? What will be the longer-term structural changes in the Chinese and other economies resulting from the pandemic and its economic effects? We don’t have answers to these questions.

Another important cause of uncertainty in the outlook is the deterioration in relations between China and the US, and between China and China’s other trading partners. The increasing rivalry between China and the US in the areas of trade, technology, security matters, and geopolitics will continue whatever the outcome of the US election in November. But the election outcome would likely lead to differences in how the US approaches these issues – unilateral bluster, insults, threats and the levying of tariffs and sanctions, sometimes with no coherent strategy, versus an effort to lead a multilateral approach together with our allies and using, where feasible, existing international agreements and institutions. Implementation of the “phase one” trade deal appears to be proceeding, with some catch-up in trade flows being necessary due to COVID-19 interruptions. Further serious US-China trade negotiations are unlikely before the November US elections.

There is certainly more work needed on US-China trade issues. We note, however, that there are real limits to any “decoupling” of the US and Chinese economies. Pursuit of protectionist actions directed at decoupling would likely be costly to both economies. The integral role that China plays in global trade is obvious. Less well appreciated is the extent of China’s foreign direct investment connections with the global economy. In fact, China leads the world in the number of countries with which it is connected through inward direct investments. And US, European, and Japanese firms have many investments in China, as do firms of emerging-market economies. While the epidemic is likely to result in some reshoring of strategic goods production, China will continue to play an important role in global supply lines.

The US-China technology rivalry is too complex a subject to cover in this note. We just observe that the US appears to be far behind China in a number of important areas of technology, many dependent on the rollout of 5G and the development of artificial intelligence applications, including innovations for financial and banking systems (e.g. digital wallets and a messaging system to complement the SWIFT payment network). China’s technology lead will continue, despite measures directed at the leading 5G firm, Huawei, and will be an important positive factor for the Chinese economy and its equity market.

Chinese stocks have outperformed, indeed soared, as the pandemic eased there, lockdowns ended, and the economy clearly began to recover. Chinese authorities encouraged the boom in the domestic equity markets, clearly welcoming the positive political value of a strong market. Last week, however, there evidently were concerns that the market had risen too fast and become “frothy.” Statements to this effect and indications that several government-controlled funds would be taking some profits were enough to cause a market correction of about 6%. After this correction, the broad-based iShares MSCI China ETF, MCHI, is up 11% year-to-date July 17. The Investco China Technology ETF, CQQQ, is up 28.6% year-to-date, and the KraneShares CSI China Internet ETF, KWEB, is up 34.3%. In comparison, the year-to-date return for the iShares MSCI ACWI ex-US ETF, ACWX (all-country except the US), is down 7.6%. We are maintaining a China overweight position in our International and Global ETF portfolios.

Cumberland Advisors has holdings of the MCHI and ACWX ETFs in its investment portfolios. The author of this note has ACWX in his personal portfolio.

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

___________________________________________________________________

Sources: Financial Times, HIS Markit, IMF, OECD, BCA Research, The Economist, Bloomberg, Goldman Sachs Research, kraneshares.com, CNBC.com


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South Korea vs. Brazil: Smart Policies and Practices Save Lives

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

There are sharp differences in the way countries have responded to the global pandemic caused by the COVID-19 virus. A comparison of the recent experiences of South Korea, widely recognized as having the best organized COVID-19 defense, and Brazil, a strong contender for having the worst defense, presents a dramatic contrast in results.

South Korea experienced the first large outbreak of the virus outside of China, registering a peak of more than 900 cases a day at the end of February. New reported cases were doubling every few days. Still, it took South Korea only one month to effectively contain the virus. By June 25, the total number of deaths reported by South Korea since the virus first arrived was a remarkably low 282.

South Korea’s public health officials were better prepared than those of most other countries because they had learned from previous serious disease outbreaks: the SARS outbreak in 2002, the H1N1 influenza of 2009, and the Middle East respiratory syndrome, or MERS, of 2015. In the wake of these challenges, South Korea better understood the importance of early testing, accurate tracking, isolation of new patients, and full transparency across all levels of government. Infectious disease prevention legislation was revised to meet these objectives. With COVID-19 the government moved rapidly to design, manufacture, and distribute accurate tests through some 600 testing centers including pop-up drive-through centers. They developed high-tech methods for rapid contact tracing through patients’ phones and CCTV footage. South Korea has not experienced the need for full lockdowns, keeping most companies and institutions open. Instead they depend on mandatory isolation of patients, either in hospitals or, for the moderately sick, in isolation dorms. Asymptomatic contacts are expected to self-quarantine.

Another important factor behind South Korea’s relative success is the willingness of the population to follow the advice of the country’s health experts. These officials have been full supported by the government, which has avoided political interference. The population, too, has learned from the difficult experience of past major disease outbreaks.

While the disease peaked more than three months ago, South Korea’s recent experience shows that governments should remain vigilant and ready to adapt, as new infection outbreaks can develop. South Korea has experienced a number of small but persistent outbreaks in the greater Seoul area, beginning with a holiday in early May. The government responded by tightening some restrictions, including closing bars and night clubs in the area, and moved rapidly to trace and test thousands of contacts, isolating those found to have the virus.

The quite different situation in Brazil was discussed in our May 20 commentary, “Cry for Brazil and Also for Latin America.” Over the past month, Brazil’s experience with COVID-19 has deteriorated further as quarantines have been lifted despite the number of cases continuing to grow rapidly. Brazil’s confirmed fatalities now exceed 53,800, second globally only to those of the US; and the country has more than one million confirmed infections to date. It is believed that the actual numbers are considerably higher. The president, Jair Bolsonaro, continues to obstruct most efforts to contain the virus, urging governors and mayors to end their lockdowns and other restrictive measures. Fortunately, many have resisted these demands. There are no nationwide rules for social distancing. The president is unwilling to wear a mask, nor does he recommend mask wearing. A federal judge has ordered Bolsonaro to wear a mask while in public in the Federal District, but he is resisting. The president says the extent of the disease is being exaggerated, and he even tried to end reporting of virus data. It is impossible, however, to hide what is happening as the virus surges with few restrictions through the poorer communities in the country, which are ill-equipped for this increasingly severe medical crisis. The situation is made even worse by widespread corruption that affects the allocation of limited medical resources.

It is true that even if the Brazilian government had followed smart policies, including adequate prior investment in the public health infrastructure, the nation’s extensive poverty, with a large portion of the population working in the informal sector of the economy and living in densely packed favelas where social distancing is impossible, would have permitted the virus to spread and cause widespread fatalities. The difficult experience of Peru illustrates this. But what is happening in Brazil looks like a worst-case scenario for a pandemic. In the end Brazil’s death toll may surpass that of the United States on a per capita basis. The simple lesson from comparing the experiences of South Korea and Brazil is that smart government policies at all levels and smart practices by citizens can be expected to save many lives.

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Sources: Financial Times, Bloomberg, The Atlantic, BBC, CNN

 


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Cumberland Advisors Market Commentary – Mexico’s Twin Crises: The Pandemic and a Plunging Economy

South of the border, our neighbor and the second largest economy in Latin America, Mexico, is experiencing a severe and still worsening health crisis due to the COVID-19 pandemic. The dire effects of the illness itself are compounded by a brutal decline in the economy, which at the start of 2020 had already been in recession for most of the past year.

Market Commentary - Cumberland Advisors - Mexico's Twin Crises The Pandemic and a Plunging Economy

Mexico has recorded over 10,000 deaths from COVID-19 and almost 100,000 confirmed cases. As the country is testing at a much lower rate than most other countries are – the lowest rate among the OECD nations – it is evident that the actual rates of deaths and cases there are significantly higher than the confirmed numbers. Like Bolsonaro in Brazil, Mexico’s leader, President Andrés Manuel López Obrador, has sought to play down the pandemic and was slow to act in shutting down the economy to limit the spread of the disease. He said that COVID-19 was “not as bad as the flu.” Since late April, he has been claiming that Mexico has tamed the crisis, but last week the country saw its highest daily increases in deaths and new cases. Nevertheless, just last Thursday López Obrador claimed once again, “We are doing well; the pandemic has been tamed.” The government announced that it is reopening after two months of quarantine, even as Hugo López-Gatell, the official in charge of Mexico’s pandemic response, admitted that he does not know the actual case and death rates. Social distancing measures are being lifted nationwide, apart from areas listed as red zones. Yet most of the country remains red.

It should be noted that even Latin American countries whose leadership acted swiftly and wisely are suffering heavily from the pandemic. Peru has seen a dramatic rise in cases even though its government moved quickly to mandate stay-at-home orders, curfews, and border closings. Two factors shared by Mexico and indeed most countries in Latin America account for this outcome: inadequate healthcare systems and income inequality that ranks among the world’s worst.

These countries have large shares of the population (more than half of the adults in Mexico) working in the informal sectors of the economy; and, regardless of lockdown orders, these people need to go to work every day to survive. Also, millions of the poor live in the region’s huge metropolitan centers, like Mexico City, in densely crowded barrios or favelas where social distancing is impossible.

Most countries in Latin America have also neglected for years to invest adequately in their healthcare systems. Costa Rica is an exception and has an infection rate lower even than that of New Zealand. Meanwhile, the hospital systems of both Peru and Brazil are becoming overwhelmed by the pandemic. Mexico’s healthcare system is broken, following years of neglect. Mexico has devoted less than 3% of its GDP to health care. Only two countries in Latin America, Guatemala and Venezuela, spend a smaller share of their national output on health care. Shortages of doctors, nurses, and equipment are claiming lives in Mexico, where lack of medical attention and even negligence result in poor outcomes. One in five confirmed cases are healthcare workers. More than 11,000 healthcare workers have been stricken.

As COVID-19 cases and deaths continue to rise, Mexico’s economy has fallen into a deep recession caused by the shutdown in Mexico, with impacts evident in all its major markets. Last year the economy fell 0.3% at a time when emerging-market and developing-country economies advanced some 3.7%. Then, in the first quarter, Mexico’s economy contracted 1.2% from the previous quarter (down 4.9% in annualized terms), with industrial output down 1.2% and services down 0.9%, reflecting early pandemic effects that began in March.

Mexico’s central bank, the Bank of Mexico, projects that the economy could decline as much as 8.8% this year. The shutdown in April of all industries and services considered as nonessential, which for the most part extended through May, caused an unprecedented drop in output in the first two months of the second quarter. The manufacture of cars and auto parts fell to close to zero, as did air traffic to popular tourism resorts. Exports of Mexican goods in April were down 41% from the level reached in April 2019. Business confidence declined in May, as did the INEGI Manufacturing Purchasing Managers Index, following declines in April and March. The fall in oil prices and reduced remittances from Mexicans working in the US are other headwinds for the economy. Stimulus measures by the government and the central bank to counter these developments have so far been relatively weak.

Mexico has now begun to reopen its economy, moving toward what President López Obrador calls a “new normal.” The auto sector has been designated as essential along with mining and construction in order to give them a head start. Pressure from the US to restore cross-border supply chains has been a factor in these early reopenings. The US National Association of Manufacturers urged action in tandem with industrial reopening in the US. Mexico’s positive response to this pressure is understandable since the United States is the destination for some 80% of Mexico’s exports. The shape and speed of the recovery in Mexico’s economy will depend heavily on the recovery in the US. We anticipate that the reopening of the US economy will generate strong growth numbers in the second half of 2020. Those numbers will be a positive factor for Mexico. Yet we think the downside risks for Mexico’s economy and for Mexican stocks are significant in view of the uncertainty about the current spread of COVID-19.

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

____________________________________________________________
Sources: Financial Times, Bloomberg, New York Times, Wall Street Journal, BBC.com, CNN.com


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