latamen
Forget China - it’s the US that really moves markets

Forget China - it’s the US that really moves markets

05-01-2016 | Insight

Chinese growth fears and Middle East tensions caused equity markets to open the new year with significant falls – but it is the US that investors should focus on, says Robeco’s Lukas Daalder.

  • Lukas Daalder
    Lukas
    Daalder
    Former CIO Robeco Investment Solutions. Daalder left Robeco in July 2018.

Speed read

  • Chinese markets drop 7% on first day on growth fears
  • Equities are also spooked by Saudi Arabia/Iran row
  • Real focus should be on US economy if data disappoints

The Chinese stock market fell 7% on the first trading day of 2016 after the country’s Purchasing Managers Index (PMI) for factory production fell below 50 for the first time, signaling contraction. This was combined with the end of a ban on selling stocks by insiders coming into effect on 8 January.

Added to the new year’s malaise was a major diplomatic spat between two of the world’s largest oil producers after Saudi Arabia executed a prominent Iranian cleric for allegedly plotting against the Saudi government. The bad Chinese and Middle East news sent European equities down over 3% and major US indices around 1.5% lower.

However, it is potentially poor economic data from the US, not China, that investors should be more concerned about, says Lukas Daalder, Chief Investment Officer of Robeco Investment Solutions, which is currently overweight equities.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

China spooks markets

“Chinese growth figures were weaker than expected, and this has spooked the markets somewhat, while the ongoing lifting of the insiders’ selling ban also caused a scare,” says Daalder. “Added to that were the rising tensions between Saudi Arabia and Iran, which did not help sentiment and pushed stocks down further.”

“However, the Chinese stock market is by no means a good guide for what European or US stocks could do; it’s a standalone creature that really has a life of its own. Certainly if there is a 7% drop on the first trading day of the year then this is going to spook everybody, but in general we should not look at the Chinese market for the direction of overall stocks.”

He says the central issue remains the obsession both within and outside China that growth will hit its target of 7% this year, which looks increasingly unlikely as the country restructures.

“Chinese growth continues to be weaker than what everyone is hoping for, but in the end this will only trigger new policy responses by the Chinese authorities, which will boost growth and give better returns to stocks,” says Daalder. “It’s more of a concern for emerging markets and consumer goods-producing countries, and to a lesser extent the producers of luxury goods in Europe. But in general, the European and US economies are not that sensitive to overall developments in China.”

‘Chinese growth continues to be weaker than what everyone is hoping for’

Regarding the latest flare-up in the Middle East, he says: “The general rule here is that these issues always feel massive to start with, and we all think these conflicts will lead to a new world war or something, but nine times out of ten they die down. We had this with Ukraine and Russia, which everyone thought was going to escalate and then it didn’t, followed by Turkey and Russia. The situation between Saudi Arabia and Iran is certainly tense and needs monitoring, but does not necessarily have to end badly.”

“It’s not something that it is wise to act on if you have a multi-asset portfolio, where you sell some risk and then there is a political breakthrough, markets go back up, and you lose all the value. We are though overweight equities, so we are in a raw spot right now, and we’re discussing whether we believe it is a temporary blip or not.”

The US is the real concern

What would cause a rethink in asset allocation is any disappointment over US data, particularly after the Federal Reserve hiked rates for the first time in almost a decade just before Christmas, says Daalder.

“The real concern is the US economy, with ISM manufacturing figures down again in what looks like a very weak fourth quarter for the US economy,” he says. “So far we have said the US economy will reap the benefits of the lower oil price and this will stimulate the economy; unemployment is still low and wage growth is picking up.”

‘The US economy will reap the benefits of the lower oil price’

“It would be very strange to now see the US economy heading towards a recession. But things have not picked up yet as much as some have hoped, and we are keenly looking to see what’s happening in the services industry.” 

“The latest estimate for GDP growth as issued by the Atlanta Fed is 0.8% in the fourth quarter which would make it one of the weakest quarters in 2015. So far we have always been of the opinion that the US economy will be OK, so we need to see a change in services in order to have a serious problem.”

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree