Why investor worries are often misplaced

June 11, 2019 12:26
The US and China have massive domestic markets, offering enough room for lots of players to thrive despite a trade war. Photo: Reuters

Pessimists would feel bad about everything, while positive investors can always see opportunities during market corrections.

Much of the recent selling pressure in equities comes from concerns over the US-China trade war.

As I have mentioned before, both US and China have massive domestic markets, offering enough room for lots of big players.

Chinese exporters can shift focus back to the home market amid the trade tensions. As for American multinational companies, they only generate around 10 to 20 percent of revenue from the China market.

Investors are always worried about an economic slowdown. But is that such a bad thing? Perhaps not, if you take strong companies.

During good times, everyone makes money but when the economy is at low ebb, weak players may exit the market, offering outperformers to expand their market share.

Investors place too much attention on the overall economy, but when investing, we are actually buying individual companies.

Take Japan as an example. It's widely said that Japan has lost three decades due to a stagnant economy.

The Nikkei index has plunged to around 20,000 points from nearly 40,000 points in 1990.

Still, companies with great vision and execution abilities have kept expanding regardless of the gloomy big economic picture. Uniqlo, Softbank and Asahi are some of the remarkable firms.

China’s economic growth has maintained at a high rate of 6 to 10 percent after the 2008 financial crisis. Meanwhile, US economic growth is only about 2 to 3 percent even in good times.

Does that mean Chinese equities should have outperformed the US market? 

Not necessarily. Because the point is this: how good are the listed companies? There is still a gap in the soundness of the business model and corporate culture; these matter more than overall GDP numbers.

Investors may also worry about antitrust investigations on US tech giants.

Will that affect their investment value? In fact, such probe occurred almost every year, but the share prices of these tech giants kept reaching new highs.

Investors like to use the current status to predict the future, but future is changing all the time.

Fed Chairman Jerome Powell said last October that the interest rate was still a "long way" from neutral level. That has shocked global equity markets, and best-performing US market also suffered in December. Powell changed the rhetoric later and said Fed would be “patient” with monetary policy, comments that helped buoy the stock markets.

But the US central bank chief changed stance again recently, saying “we will act as appropriate to sustain the expansion”. That has fueled market speculation that the Fed will cut interest rates twice this year. And China’s central bank is also easing.

This article appeared in the Hong Kong Economic Journal on June 7

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal