By Michael Santoli
There was a time, not long ago, when a strong stock market and rising investor optimism were almost synonymous with a strong belief in the China growth story. This rule is being bent almost to the point of breaking so far in 2013.
The Standard & Poor’s 500 index (GSPC) has barely wobbled in the face of Cyprus-driven contagion fears even after logging a 10% year-to-date gain, making the American market the place global investors want to be. The mainland Chinese market, in contrast, has been among the world’s weakest, with the iShares FTSE China 25 exchange-traded fund (FXI) suffering a 10% decline, the magnitude of setback often formally classified as a formal correction.
JPMorgan (JPM) strategists this week piled on by downgrading their view of Chinese stocks, citing the “nasty combination” of a slowing economy and a central bank focused more intently on countering price inflation and suppressing speculation in China’s frothy real-estate market than in stimulating growth.
As Aaron Task and I discuss in the attached video, world markets have already been registering fears that the familiar global-growth dynamics - China-led expansion, demand-driven commodity price gains and ample capital flowing to Asia and Latin America – don’t apply in the present market environment.
The iShares MSCI Emerging Markets ETF (EEM) has lagged the S&P 500 by 14 percentage points year to date while the U.S. dollar has been stronger against major world currencies. Copper prices, for instance, are down 10% in the past month and sit more than 25% beneath their 2011 peak. This fits with the fact that half the countries in the world had at least one quarter of economic contraction in the fourth quarter.
The pressing question for investors now is whether the conspicuous divergence between the strong U.S. market and flagging global-growth bellwethers can last. Big money investors do not seem positioned for America’s leading role to be challenged any time soon. The monthly Bank of American Merrill Lynch global fund manager survey released Tuesday showed the highest percentage of managers overweighting the U.S. since July, and found a pronounced distaste for emerging-markets-related commodity plays.
The strong preference for assets tethered to the domestic U.S. recovery theme is understandable. The housing market recovery is a re-energized growth engine, measures of capital spending and employment have come in better than expected, America has a new energy boom to exploit and the Federal Reserve is, by far, the central bank that commands the greatest investor faith in its commitment to accommodative monetary policy.