In the immediate aftermath of the recent G7 summit in Japan, the strategic realignment of world leaders vis-à-vis China has raised pertinent questions regarding the future of global trade and economic relations. The leaders expressed a desire to minimize risks by decreasing their dependence on China, while emphasizing their desire to maintain existing economic ties. However, these statements were perceived as hostile by the Chinese authorities.
It is critical to understand that this rhetoric, while initially concerning, emphasizes risk reduction rather than the complete decoupling of the Chinese economy. In this sense, this realignment may prove beneficial for global markets in the long term, by integrating more security measures into the global economy, a preference that was reinforced at the summit.
A key point for investors concerns relocation. Although this trend may be seen as a long-term threat to China, its short-term impact may be less. The relocation process is more complex and expensive than most people imagine. Take Apple as an example: despite efforts to increase production in India, the company faced factory efficiency challenges, affecting its long-term profitability.
On the macroeconomic front, China faces an uneven recovery from COVID restrictions. Several factors contribute to this situation, including limited financial support for households by the Chinese government, stable monetary policy and challenges in the real estate sector. Investors should exercise caution and carefully monitor sectors that are doing well despite this uneven recovery, such as the services and premium goods sector.
Chinese stocks: The performance of Chinese companies in this context is also uneven. For example, Alibaba has seen its revenue decline, which is symptomatic of economic weakness. In contrast, Tencent showed a notable increase in revenue, although this performance was due to specific factors and not an overall economic recovery.
As China progresses with its reopening plan, a substantial increase in demand is anticipated in various sectors such as travel and leisure, luxury goods, while the restart of industrial activities could lead to higher demand for energy and basic products.
However, it is worth remembering that China's economy is currently in a recovery phase and a rapid recovery may be overly optimistic. China's labor market, particularly the youth unemployment rate, which has shown an upward trend in recent months, is a key indicator to watch.
As for global supply chains, gradual normalization is expected, but lingering issues, such as semiconductor shortages, could continue to hamper certain sectors, including technology and automotive.
In this context, it is plausible to predict that Chinese stocks could relatively outperform over the next 12 to 18 months. However, various factors such as the gradual monetary normalization of the People's Bank of China, geopolitical and trade tensions, as well as internal concerns over the real estate sector could create turbulence on the road to recovery.
For investors, this economic landscape requires careful assessment of risks and opportunities, both in Chinese and international markets. Sector and geographic diversification of portfolios, coupled with constant monitoring of macroeconomic trends and domestic policies, can help navigate these uncertain waters.
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