Risks to Watch for Global Stocks

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Amber Sinha, Senior Portfolio Manager, CIBC Global Asset Management.

When we look at markets across the world and ex-U.S., there are some areas that have been doing better than the others. So some markets as a result have been outperforming, and others, not so much. So this is something that we’ve observed in the markets outside North America.

For example, for the year 2020, so far, Europe is down 10% for the year in local currency. Whereas the MSCI Asia Pacific index is actually up 2%. So, within eight months we’ve had a, let’s say, 12% gap in the performance of Asian markets, Western Europe. So that’s certainly something to take note of.

Why that has happened, I would say is for two reasons. Asia was the first in first out of the global pandemic. Now, again, it’s too soon to be saying whether they’re out or not, but they were certainly the first to go in, and in terms of being the first continent to move past the peak in terms of the Covid pandemic. So I think that has certainly brought some economic activity back to life. And as a result, those markets have responded to that.

The other reason, again, is technology. Now, technology, like in the U.S., is fairly powerful outside the U.S. as well. We have some very large technology companies in China, in Asia in general. And these stocks have certainly done well in an environment where technology continues to outperform the market. Europe by that measure, is fairly underrepresented in technology, just from a market cap point of view. And as a result, we’ve seen more of a muted recovery in the European stock markets, just from the lack of enough technology representation in there.

The risks, in the non-U.S. markets that one should be watching out for, again, China-U.S. relations, that certainly stands out. Last year we had a little bit of a scare with regards to China-U.S. trade. That seemed to be a federal issue towards the end of the year. The market responded favourably to that. Now again, we’re back in an election year with the U.S. economy struggling, at least in part.

I think the chances that the U.S.-China trade relations — and even broader relations outside of trade, just on intellectual property, on technology representation on Chinese listings in the U.S. stock market — there certainly seems to be a lot of noise around the China-U.S. relationship. So that’s something that certainly should be kept in mind when venturing outside the U.S. stock markets.

The second fairly obvious one would be the risk of a resurgence. So, as I said, one of the reasons why Asia has been a better performer compared to Europe is because the market understands that they were first into the pandemic and first past the peak as well.

So, we need to follow the situation with the pandemic and look for a resurgence. If there is a resurgence in Asia, more than in Europe, then certainly there should be some changes made to any portfolio allocation. But generally I would say you have to definitely watch for resurgence in Covid-19 cases because we’re frankly not out of the woods yet.

The other risk I would say is that the rebound in the stock market since the lows in March, April has been uneven. So some markets have done better than the others. China, for example. The Chinese stock market is up 14% for the year. It’s actually the best performer among the major markets in the world.

So, as with China, as with the U.S., as with Europe, you always have to make an assessment of the rebound in the stock market versus the rebound in the economy. Is the stock market going too far ahead of itself? And I think that is a real risk in the U.S. but it could also be a risk in the European Asian markets as well. So, I think we have to make sure that the stock market recovery is reflective of what’s happening on the ground. We cannot make the mistake of getting too optimistic based on share prices, when the situation on the ground doesn’t warrant that. So, that’s something to keep in mind as well.

When you look at China and explain the returns in the market since the March lows, it’s actually interesting that, despite the strong rebound, the rebound has been fairly narrow, it has been limited to an extent to Chinese internet and technology stocks. So you look at stocks like Tencent, Alibaba, and there are a few more hundred billion market cap companies that no one has heard of.

So a lot of these stocks have been very strong performers and have led the market on the way up. Because of the pandemic, a lot of things that were pro-e-commerce, pro-digital have been accelerated by people who were sitting at home during the pandemic. So, the internet stocks have certainly benefited a lot from that.

Where we have not seen much recovery in China is in the general industrial consumer space. And if we do not see a resurgence of the pandemic in China, I think these would be the next areas to look for because then when we see a rebound in the Chinese economy, and then a lot of these mainstream sectors will also participate in that. So I think we are yet to see that. And if the recovery in Chinese GDP continues, I’m sure there are other sectors that will, in the future, contribute to the Chinese stock market performance.