While Europe and US are once again battling the resurgent in covid-19 cases, China has so far managed to hold on to its success in containing the spread of the virus, with a low case growth trend and an economy that is back on track. The stark contrast between the regions is also represented in market returns, with stocks listed in Shanghai surging by more than 10% over the third quarter, outperforming both US (+8.47%) and European (-1.25%) equity markets, and recording a total return of close to 20% on a year-to-date basis.
The International Monetary Fund (IMF) referred to the faster than expected economic recovery in China in its updated World Economic Outlook issued earlier in October. The outlook, titled “a long and difficult ascent” following the Great Lockdown in April, provided for a less severe contraction forecast than the one issued last June.
The IMF upgraded its global growth expectations to a decline of 4.4% in 2020, as a result of second quarter GDP results in large advanced economies, China’s stronger than expected return to growth and signs of a more rapid recovery during the third quarter. The IMF now expects for growth globally to rebound to 5.2% in 2021 and that all economies with exception to China, to register output levels below 2019 levels. Meanwhile, China, which is already exceeding 2019 levels this year, is expected to continue to grow into 2021.
Macro-economic data released earlier in the week continued to confirm the growth trajectory in China’s economy. Albeit below market expectations, the Chinese economy grew by 4.9% year-on-year during the third quarter, following a 3.2% expansion in the second quarter. Despite the lower than expected third quarter GDP data, September industrial production and retail sales were stronger than expected.
Growth in industrial production remains the key driver to China’s economic revival. During the month of September, China’s industrial production grew by 6.9% year-on-year, recording better than expected output in manufacturing, and industries such as machinery, general equipment, chemicals and textiles.
Furthermore, China’s industrial output has returned to growth for 2020, fully recovering from the double digit declines at the start of the covid-19 outbreak. As a result, the industrial capacity utilisation rate in China has returned to pre-pandemic levels of 76%, a strong recovery from the 67% capacity utilisation rate recorded in the first quarter of 2020.
Further economic data released earlier in the week also suggests a continued recovery in the services sector. September retail sales came in above market expectations, recording the highest growth for this year, up by 3.3% year-on-year and the second straight month of increases. The increase in sales was recorded across most categories, including automobiles, clothing and footwear, and personal care. Even so, retail sales in China are still in contraction, 7.2% below the start of the year.
The improvement in retail sales is also captured from a micro perspective. Louis Vuitton, which reported third quarter results last week and generates over one third of its sales in Asia, highlighted the strength coming from Asia over the third quarter. Despite noting significant improvement in trends in all regions compared to the first half of the year, LVMH benefitted from a double digit organic growth rate in Asia, while growth rates in Europe, US remained negative.
China, which was the first country to be impacted by the covid-19 pandemic, was also the first to enter and exit from economic restrictions and subsequently has managed to achieve the strongest recovery in output. Its resilience largely depends on its continued success to limit the spread of covid-19 and subsequently to avoid implementing economic restrictions, a feat which the rest of the world is struggling to master.
This article was written by Rachel Meilak, CFA, Equity Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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