UBS: Four investing lessons from China’s recovery

Highlights

• China was the first to recover output losses from the pandemic. The evolution of its economy and financial assets are useful leading indicators for global market activity.
• Chinese stocks are lagging year to date after leading in 2020, bolstering our conviction to stay in early-cycle geographies.
• Manufacturing output and exports remain resilient in China, a reminder that investors should focus risk exposures in markets levered to the continued strength in goods.
• There is no abrupt turn in Chinese policy support. Globally, policy is also slated to stay stimulative. As such, we favor equities over credit, and remain positioned for steeper yield curves.
• However, China also shows us that policy risks will become more two-sided as economies fully heal. This supports our preference for ex-US equities.
  

Right now, investors are working from a common set of assumptions: Global activity is poised to meaningfully accelerate as vaccinations allow for a durable economic reopening. The US economy will lead the way, thanks to above-average progress on vaccinations and potent fiscal stimulus. Recoveries will be uneven across geographies due to disparities in vaccine access. In some countries, and for some high-touch services sectors, the ongoing persistence of the pandemic will prevent a return to full health for a prolonged period.

This conventional wisdom does not make asset allocation any easier. To the contrary, the extent to which these consensus opinions are embedded in market prices may make deciding where and how to take risk a more difficult endeavor.

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