Don’t Let Today’s Market Drop Fake You Out


When your editor contemplates China, his eyes normally turn north.

Today they go west.

The difference is I’m currently in Baltimore on the east coast of the United States.

Let me give you the bad news first: The outlook for China is as murky from here as it is from my normal abode in Melbourne.

But today’s Profit Watch poses a tentative thought: China may be muddling along better than we assume.

We’ll follow this thread today and see where it takes us.

Let me get one thing clear out of the way. The China slowdown is an Australian problem, not an American one…

I was chatting over breakfast with a researcher – Simon – who’s been around the business a long time. Lately, he’s been doing a lot of work with an office out of Hong Kong.

They’ve been working on some exciting opportunities around the Asian emerging markets. Part of his task is to highlight the potential of this to his American clients.

It’s a hard sell.

But it’s not from the data or the logic or the scale. It’s all there, and genuine.

It’s because the American mindset just does not easily connect investing opportunity to Asia.

I get what you’re thinking. They’re Americans. Half of them can’t find Texas on a map, let alone Hong Kong or the Philippines.

But fair play to them: They don’t need to leave the US domestic market to make money.

Nor is their economy dependent on China as most tend to presuppose.

We can see this in the latest data. It’s enough to get Donald Trump steamed up again.

The Wall Street Journal reports that Chinese exports rose 15.6% over the last year in October. They smashed expectations…tariffs be damned.

It was a global lift, too. Brazil and India were just as important as Europe and the USA.

But the US trade deficit with China is getting bigger, not smaller. That means China is shipping a lot of goods to the USA, but not the other way around.

US takeaway: A slowing China doesn’t buffet the American economy in the same way as ours.

Alibaba smashes its own record

But just how bad is China going, anyway?

We’ve seen their exports are still firing.

Then, on November 11, we had Alibaba’s infamous Singles Day promotion. This is now the biggest shopping extravaganza in the world. Last year, they processed US$25 billion worth of goods in 24 hours.

This year, they ripped up that record. On Sunday, the total clocked in at US$30.8 billion.

It is true that Alibaba recently cut its full-year forecast as China cools. But it’s still doing a lot of business. Online retail sales grew 24% in the third quarter. It was 36% the one before.

Harvey Norman would love to report those kinds of numbers.

Here’s the other thing…

Everyone ‘knows’ that China is slowing down. It’s taken for granted. The markets, therefore, have priced this in long ago. Accepted notions like this don’t give any investing edge.

There would need to be an even more drastic revaluation down for China’s outlook to shake the market from here.

You wouldn’t assume that outcome going off some of the action in the commodity space. Iron ore is still trading at US$76 a tonne.

Zinc and copper inventories on the London Metal Exchange keep trending down.

Oil imports were up 31% in October this year over 2017.

But we can’t rule out another China-led market wobble, either.

Put this date in your diary

That’s because we do have an important hurdle to clear: The G20 summit in Argentina is less than three weeks away.

China’s Xi Jinping and Trump will meet.

We know Trump’s not one for quiet reflection and observing protocol. If he’s not happy, it will all be over Twitter before it’s even over.

Any escalation of the trade war could bring on another panicky drop in the US – and Aussie – stock market.

The flip side is bullish: A deal would mean a likely rally higher.

It’s hard to see stocks breaking out in a big way before this meeting.

Right now, US stocks are down for the day…over 2%. Aussie stocks will react to this. Down.

My suggestion? Hold steady.


Callum Newman Signature

Callum Newman,
Editor, Profit Watch