viernes, 25 de octubre de 2013

viernes, octubre 25, 2013

Wall Street's Best Minds

THURSDAY, OCTOBER 24, 2013

A Shift in Country Bets

By PAUL CHRISTOPHER

A Wells Fargo Advisors strategist writes that he is moving stock exposure to Japan and several European nations.

 

Much of Asia's equity market performance this year has followed Beijing's policies to restructure the Chinese economy. The equity markets of Hong Kong and Australia tend to move closely with economic developments in China, and we added these markets as favorites, while international markets seemed too pessimistic on China.


The early-year caution about China eventually gave way to optimism that has supported Hong Kong and Australian equity markets, but we think the optimism has become excessive, considering the challenges that China faces in 2014.

We consequently removed Hong Kong and Australia from our list of favorite developed equity markets, retaining Japan but otherwise holding a mostly European emphasis.

China's economy has been slowing since early 2010, but since last year we have expected the second half of 2013 to improve. Part of the problem was the global economic slowdown, which weakened orders for Chinese export goods.

Simultaneously, China's leaders realized that their export-driven economy might be less vulnerable to world economic shocks if China can better balance the contributions from exports and domestic spending. The change is potentially profound for China and for the countries that supply China's manufacturing industries. As Chinese manufacturers downsize and reduce exports, local unemployment should rise.



Negative spillovers also are very likely to wash over Hong Kong, a principal port for Chinese manufactures, and Australia, which supplies China with many industrial raw materials. China's new and reform-minded government administration took over in March 2013 and quickly prompted questions about how much economic disruption China might create – both for itself and for its main supplier countries.

Uncertainty about the pace and effects of China's reforms, plus sluggish global trade early this year, encouraged investors to sell Asian currencies and securities, and those of countries that supply China. We thought the negative reaction too strong. After all, global trade is gradually improving, and so is U.S. household spending. These developments boost orders for China's manufactures. In addition, we think it important to remember that China's leaders are managing the rebalancing process.

The Chinese economy is likely to slow – we think it must slow, if Beijing is as serious about reform as government statements all year suggest -- but Beijing appears to be watching carefully the trends in unemployment and spending. Thus, when the economy seemed to be slipping too quickly during the spring, Beijing implemented new government spending and monetary easing, which stabilized the economy.

As China's economy gathered pace in mid-summer and into autumn, the pessimism about other countries linked to China's economy also faded quickly. Two other factors have helped: The U.S. Federal Reserve relented in September on a threat to reduce its monetary stimulus. The September decision extended the prospect of a large increase in the supply of U.S. dollars, weakening the dollar's value and broadening the potential attractiveness of international investments.

Second, the end of Europe's economic recession at mid-year injected hope that China's single largest regional customer will begin buying Chinese goods at a faster pace.


We think the enthusiasm for Australia and Hong Kong has now gone too far. Their domestic economies have been unimpressive. Hong Kong's retail sales have weakened. Also, Australia's mining sector figures need years to downsize, but Australia's other sectors have failed to pick up the spending slack in the economy. The external factors supporting the optimism also seem transitory.

We believe the Federal Reserve inevitably will begin removing economic stimulus and so add a headwind for international investment returns. In addition, we think global trade will gain only slowly next year: U.S. and European economic growth, while now both positive, may improve only gradually. (We consider, for example, that European bank loans are still unchanged or contracting in many countries.)

Most importantly, we think the optimism about China's recent economic improvement risks are being extrapolated too far. China's second-half rebound has been a deliberate government policy to stabilize the economy: In late summer, Beijing announced it was dusting off some previously shelved building plans for railroads, sewers, and other infrastructure projects.

China seems to have many such plansindeed, we think China has years and trillions of dollars in infrastructure work yet to finish – but Beijing's rebalancing plans ultimately are about stimulating service-sector development and consumer spending, which could take years to complete.

In the meantime, we believe Beijing will continue to use government spending for building projects and bailouts (where needed) to avoid the social pressures of rising unemployment.

Investment recommendations


International investors extrapolate China's outlook even further, and considering the lackluster domestic spending outlook in Hong Kong and Australia, we removed both from our list of favored or satellite markets. Both seem likely to see increased price volatility in the coming months.

We maintain some equity exposure within Asia, namely in Japan and, on the emerging-market side, Taiwan. These two economies have a more balanced economic exposure, meaning that they depend on business in the United States and Europe, at least as much as they do on China.

By contrast the economies of Australia and Hong Kong are more China-centric. The change has implications for our recommended investment strategy. In general, we suggest splitting international equity positions into developed and emerging and, within each category, to divide the allocation equally between a diversified position (the core) and the satellite group.

In dropping Hong Kong and Australia, we thereby recommend liquidating Australian and Hong Kong equity positions and reallocating the proceeds equally among our remaining satellite picks (Japan, Germany, Belgium, and Switzerland), or to reallocate the proceeds to a core and broadly diversified position in developed-market equities.


Christopher is chief international strategist with Wells Fargo Advisors, a unit of Wells Fargo & Co.
 
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