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What an embarrassment. Over the last three months, China—the country beat up most by President Trump and his team of “tariff men”—has outperformed the U.S. stock market by at least 100 basis points. That includes the mainland equity market known as the A-shares, which has been pummelled this year on account of the trade war. Adding insult to injury, investors are dumping U.S. stocks and bonds, and China is seeing fresh money pouring in.
Equity and bond funds both saw over $8 billion flow out with redemptions largely following the pattern in place since midyear, according to fund tracking firm EPFR Global in Cambridge, Massachusetts.
That pattern has fixed-income investors bailing out of fund groups they fear will have liquidity problems if markets really turn sour and rotating into shorter-term fixed-income funds in the U.S. Equity investors are cutting their exposure here and in Europe and buying Asian stocks, mostly in China. Retail flows to this U.S. stock mutual fund group were negative for the 76th straight week. There is a strong possibility this fund group will end 2018 without a single week where retail flows were positive.
See: Wall Street Challenging Trump To Dump Powell — Forbes
Jay Powell Is A Nightmare For Trump, And The Stock Market — Jim Cramer, The Street.com
China Pledges Even More Stimulus — Bloomberg
In the last week, China equity funds saw $1.58 billion in fresh money. The U.S. had net outflows of $4.4 billion. The story here is that people are gravitating towards markets that have some sort of state underpinning. China is easing on the credit side and the Fed is not.
The Fed raised rates as expected on Wednesday. But Chairman Jerome Powell’s comments on two more rate hikes next year spooked the market. Investors want a more dovish tone from the Fed before deciding on whether the bears will finally beat the bulls next year.
Market expectations are for quarterly GDP numbers to come in at around 3.5%. Durable goods orders are also expected to be solid, up 0.3% versus 0.2% in the previous quarter. Weakness in these data points might give investors the sense that the Fed could pause during its next monetary policy meeting in March.
U.S. equity markets peaked at the end of January this year as investors started to pencil in impacts of trade tariffs on the macroeconomy. Most economic analysis played down the effects of a trade war on the U.S. with many economic models predicting a half-a-percentage-point contraction in the event of a full-blown trade war.
Meanwhile, Fed tightening has led to concerns of a “dollar liquidity shortage” hurting emerging markets. The MSCI Emerging Markets index spent much of 2018 in a persistent downward trend. Only some countries outperformed, like Brazil in particular, which continues to see portfolio inflows.
If the trade dispute is resolved in the 90-day ceasefire period, then the market will recover. Though this is more likely to impact China once again as it is the market most impacted by tariffs and has state support backstopping economic weakness. The U.S. is doing the opposite, with the Fed willing to at least tap the breaks on the economy and threaten the red-hot job market.
The trade war and the Fed have become a downside risk for the global economy, with the major exporting economies, Germany and Japan, suffering negative GDP growth in the third quarter. European equities are in worse shape than U.S. equities, for sure.
China may be seeing more money coming into its stock market than the U.S., but investors are throwing money away, at least in the short term.
“China is closer to experiencing a hard landing,” thinks Neil MacKinnon, an economist with VTB Capital. The Shanghai Composite Index is in bear market territory despite some degree of monetary and fiscal loosening by the central bank.
