Follow the trade flows to get to the big picture

Chinese export figures for March, published earlier this month, appear to be giving global stock markets a lift, as they soothe one of the three key fears which helped to derail share prices earlier this year.

“Risk” assets took a drumming as markets took fright about:

• A hard landing in China
• Falling oil prices
• Rising US interest rates

They have begun to recover as all three issues no longer look quite so frightening:

• Oil prices have rallied from a year-low of barely $28 to somewhere north of $40, even after the failure of the Doha OPEC-non OPEC conference.
• The US Federal Reserve has backed away from its initial plan of four, one quarter-point interest rate rises in 2016 and is now aiming for two hikes. The market is currently pricing in just one hike, so let’s see what comes out of next week’s meeting of the Federal Open Markets Committee (26-27 April).
• Chinese exports rose 11.5% year-on-year in March. Even allowing for the noise in the January-February figures caused by the timing of the Chinese New Year holiday, the March data broke a long losing streak to offer hope the global economy is getting back on track after a sticky spell during the winter. 

March surge in Chinese export data offers encouragement to bulls of the global economy and global stocks

Source: Thomson Reuters Datastream
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

It is to be hoped the Chinese numbers in particular do not turn out to be a blip, although they do not tally too well with other trade and shipping statistics. As such, investors would perhaps like to wait before getting too excited and another few months’ worth of positive data would be nice by way of confirmation.

Anyone wishing to buy into the global growth narrative may be best off ignoring Chinese equities, as they appear to march to their own tune anyway, having boomed, plunged and then rallied in the last 12 months alone. If history is any guide, emerging markets, commodity-producing nations and export-driven markets like Korea and Japan would be logical places to look (especially as they were hit hardest during the market sell-off) when it comes to doing further research.

Anyone wary of the market’s new-found optimism, and still concerned about the quality of the data, the health of the global economy and relentless growth in global indebtedness, may take a less sanguine view. Here, sovereign bonds could play a more prominent role in portfolios, along with equity income funds, as a means of playing relatively safe while seeking coupons and dividends to boost client returns and help them weather any fresh market squalls. 

The first of May, when markets traditionally enter their summer lull, is nearly upon us after all.

Goods and services

It is frankly a relief to see the Chinese export data finally show an increase, even if a few more positive numbers in the months ahead would provide confirmation of a trend.

The figure will be particularly welcome to bulls, since export figures from the US, UK, Japan and Germany are still showing a marked lack of momentum:

Major global economic powers are suffering from weak export momentum

Source: Thomson Reuters Datastream
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

This may explain why the world’s central banks are still obsessed with weakening their currencies, to try and eke out some competitive export edge. The figures may also suggest such policies are a waste of time, as everyone can’t have a weak currency at the same time and this is a zero-sum game that no-one can win. 

Besides such philosophising, these numbers potentially have important implications. This column has touched before on the apparent weakness in global trade flows, a bad sign for the global economy, and this bearish data from the CPB is supported by the feeble export numbers from the US, UK, Japan and Germany.

Bottom-up numbers by country tally with the bleak top-down global trade flow data

Source: Thomson Reuters Datastream
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

This barrage of bleak numbers does question whether the Chinese March recovery is sustainable.  The spring surge is also questioned by two key shipping indices, the Shanghai Containerised Freight Index and the Chinese Containerised Freight Index. Both benchmarks have swooned this year, something that would hardly be likely if business was booming (even allowing for the role that could be played by increased ship supply, as well as sloppy end demand):

Chinese freight indices make for frightening reading

Source: Thomson Reuters Datastream, Shanghai Shipping Exchange
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

This sea-borne slump is also reflected in the Baltic Dry shipping index and also key stock market plays on the shipping industry, such as the US-quoted Guggenheim Shipping Exchange-Traded Fund, which comes with the ticker SEA on the New York Stock Exchange. 

At least the Baltic Dry index is trying to rally, helped along its way by a rebound in the Bloomberg Commodity benchmark. If both of those keep going the right way, perhaps China really will be capable of turning around its own fortunes and those of everyone else, for that matter.

Guggenheim Shipping ETF still looks all at sea ....

Source: Thomson Reuters Datastream, Shanghai Shipping Exchange
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

... but at least the Baltic Dry index is showing some signs of life

Source: Thomson Reuters Datastream, Shanghai Shipping Exchange
NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

Back to the 1930s

As a final point, these data points all help to reaffirm the importance of global trade flows at a time when Donald Trump is advocating greater protectionism in the USA and much of the EU referendum in the UK centres on the benefits (or lack thereof) brought to British trade flows by the UK’s membership of the Eurozone. 

The historians among us remember America’s 1930 Smoot-Hawley Tariff Act all too well. It may not have caused the Great Depression but it is unlikely to have aided the recovery, as the USA raised tariffs and used protectionism to try and support domestic agriculture. 

The results were predictably grim. According to the US Department of State, US imports from Europe fell 80% between 1929 and 1933 while exports to Europe fell by 67%. The law did little to help foster good international relations at a time when they were most needed as countries took an “every-man-for-himself” approach. The global economy finally got a welcome leg up from Washington’s 1934 Reciprocal Trade Agreements Act.

This is not to pretend this column has a crystal ball when it comes to what a Brexit vote or Donald Trump’s policies may mean, if he is elected and they are implemented (and it certainly does not have a crystal ball as powerful as George Osborne’s). 

But it does highlight how investors must keep these two key votes on their radar this year, as they have the potential to create upset (although such upset could be a chance to buy assets cheaply as much as it may prompt some to think it may to time to sell them dearly).

Russ Mould
AJ Bell Investment Director