Trade headlines have kept investors on tenterhooks in recent weeks and left stock markets on Wall Street and across much of the world down.
Not in China though. The benchmark Shanghai and Shenzhen stock indexes hit their lows for the year on Oct. 18 after China’s government reported that the country’s economy grew at its slowest pace in nearly a decade during the third quarter. Since then, the two indexes are up 6 percent and 10 percent. By comparison, the S&P 500 has fallen more than 4 percent over that period.
It’s not that investors in China are sanguine about a trade war. It’s that they just began selling much earlier.
Chinese stocks tumbled more than 25 percent from mid-March through Oct. 18. That pushed valuations on Chinese stocks, by some measures, to their lowest levels in four years.
The steep declines were partly because China’s economy is more susceptible to a trade war than America’s. China sells a lot more to the United States than it purchases. The Trump administration’s aggressive approach to trade also came at a delicate time for China. The country was trying to tackle its considerable debt problem without slowing its economy further.
A similar shift in sentiment was experienced across emerging-market stocks. Pressured by trade, rising interest rates in the United States and a stronger American dollar, the MSCI Emerging Market Index fell about 20 percent this year to its low in October. That left those stocks looking cheap too.
Some of the pressures on emerging markets have eased since then. China and the United States agreed to a 90-day trade truce, the dollar has weakened and investors increasingly believe the Federal Reserve will slow its pace of rate increases next year. Over the last six weeks, emerging-market stocks have gained 5 percent.
China is hardly past many of the concerns that have pulled down share prices this year. The country is still wrestling with how to ease its onerous debt burden without hurting economic growth, and trade negotiations could fall apart or end without any resolution.
Could the recent performance of China’s stock market indicate that the effect of the trade war on share prices is nearing a bottom? After all, sometimes the markets that get beat up the most, are also the first to show that the worst is nearing an end.
We will have to wait to see if that is the case with trade.