Bull in a China Shop
I was reading a profound philosopher the other day whose teachings are applicable to the financial markets. I’m referring, of course, to Dr. Seuss.
During the Christmas holidays I was reciting to my twin toddler grandsons “The Cat in the Hat” and this phrase struck me as apropos for investors: “Step with care and great tact. And remember that life’s a great balancing act.”
Is your portfolio properly balanced? According to our flagship publication, Personal Finance, a sensible balance of assets under current conditions is 45% cash, 30% stocks, 15% hedges, and 10% bonds. Below, I’ll steer you toward a highly profitable opportunity suitable for your stock sleeve. Part of your investment balancing act should be exposure to international stocks. I’ll also explain why China is a key pillar of the bull case for 2021.
On Monday, the first trading day of the year, the hot stock market took a belated breather. The Dow Jones Industrial Average fell 382.59 points (-1.25%), the S&P 500 slipped 55.42 points (-1.48%), and the tech-heavy NASDAQ declined 189.83 points (-1.47%).
The industrials, real estate and utilities sectors were hit the hardest Monday, as investors priced in the risk of a Democratic sweep of the two Senate runoff elections on Tuesday. Wall Street fears that Democratic control of the Senate would increase the odds of corporate tax increases. The resurgence of the coronavirus also weighs on investors’ minds. But as I’ll make clear, Monday’s selloff does not alter the positive long-term picture. In pre-market futures trading Tuesday, all three indices were set to open higher.
Stock prices are bets on future corporate earnings growth and on that front, the news is positive. According to research firm FactSet (the data provider for Investing Daily), the projected year-over-year earnings growth rate for the S&P 500 for calendar year (CY) 2021 is 21.8%, which is above the 10-year average annual earnings growth rate of 10.0%.
FactSet’s growth rate number is based on the analyst consensus. If 21.8% is the actual growth rate for the year, it will mark the largest annual earnings growth rate for the index since CY 2010 (39.6%). All 11 sectors are projected to report year-over-year growth in earnings.
The global economy is expected to bounce back this year, as COVID-19 vaccines achieve wider distribution. To be sure, the pandemic has left considerable economic damage in its wake. When the final numbers are tabulated, most developed countries are looking at sharp declines in 2020 real gross domestic product (GDP), as the following chart shows:
That said, the GDP declines were not as bad as feared. In its latest World Economic Outlook, the International Monetary Fund (IMF) revised its 2020 global growth projections upward, indicating a less severe global recession compared to its previous forecasts. Factories in Asia and Europe increased their output in the fourth quarter of 2020, an auspicious sign for Q1 2021.
Revving the global growth engine…
The more optimistic revisions were driven by better-than-expected performance in the second half of 2020 for developed economies and a return to growth in China.
According to the IMF: “Activity normalized faster than expected after most of [China] reopened in early April, and second quarter GDP registered a positive surprise on the back of strong policy support and resilient exports.”
China is the global growth engine and Beijing is stomping on the gas pedal. China’s leadership plans to set its real economic growth target at about 8% for 2021. The Chinese economy advanced 4.9% year-over-year in Q3 2020, faster than its 3.2% expansion in Q2.
The Chinese government has boosted its debt financing to spend more on job-creation projects. Those expenditures have reverted to within historical ranges when measured as a percentage of GDP.
China’s infrastructure projects are particularly good news for commodities prices and the miners of these raw materials. China’s ambitious “Belt and Road Initiative” extends through 60 partner countries, with planned construction that will consume huge amounts of raw materials for several years.
In language that the incoming Biden administration would do well to heed, the IMF expressed support for China’s stimulus, stating: “The additional debt incurred to finance such endeavors is more likely to pay for itself down the road by increasing the overall size of the economy and future tax base than if the borrowing were done to finance ill-targeted subsidies or wasteful current spending.”
According to the latest available data from the Organisation for Economic Co-operation and Development (OECD), the fastest growing economy in the pandemic-beleaguered world is China. The following chart tells the story:
Chinese equities finished 2020 at multi-year highs, a bull run that should continue as 2021 unfolds. The coming year should also witness a reduction in tensions between the U.S. and China.
In a sign that the U.S.-China trade war will dissipate in the Biden era, the New York Stock Exchange on Monday announced it had reversed its decision to kick out three of China’s largest state-owned telecom companies.
The NYSE said it no longer intends to delist China Mobile (NYSE: CHL), China Telecom (NYSE: CHA), and China Unicom (NYSE: CHI), a move initially taken to comply with an order President Trump signed late last year that bans Americans from investing in firms that the U.S. government suspects are influenced by the Chinese military.
For all these reasons and more, I’m optimistic about 2021, especially the second half of the year. I don’t mean to minimize the human suffering caused by the coronavirus. Real people are at stake, not just dollars and cents. But when the coronavirus crisis fades (and it inevitably will), certain sectors will rebound more strongly than others. One sector poised to reap outsized gains in the post-COVID world is technology.
In 2020, for the second consecutive year, the technology sector was the top performer among all 11 S&P 500 sectors. Technology stocks overall posted a gain of 43.6%, according to FactSet.
Most of those gains were fueled by a handful of mega-cap stocks, whose shares have gotten pricey. We can expect a modest pull-back among the brand name tech stalwarts, which have gotten ahead of themselves. However, small-caps are on a tear and they should sustain their momentum in the coming months, which makes small tech offerings attractive.
Indeed, our investment experts have unearthed a little-known $5 stock that’s a crucial player in 5G wireless capabilities. It’s an under-the-radar tech innovator that nonetheless boasts an international footprint. The time to invest in this bargain-priced company is now, before the rest of the herd catches on and bids up its price. Click here for details.