More worried about China or Spain?
There was quite a sharp market reaction to Chinese trade data this week. On Monday, China recorded its first trade deficit in 22 years. While this is a significant development, it is not so bad that it signals a major slowing underway in China. Indeed, the driver of the deficit was a surge in imports (which indicates that Chinese households are still spending – now more than ever). The deficit reflected slow growth in the US and Europe and it’s important for investors to be mindful that the modest slowdown in China (from 11% growth in 2010, to 9.2% in 2011 to a forecast 8.2% in 2012) is the result of government policy.
The Chinese authorities are trying to squeeze the excesses out of consumer prices and housing prices in major cities and they have been quite successful. This is expected to make the Chinese economic cycle more sustainable over the medium term, which is something investors should be content with, rather than concerned about. There isn’t too much to be concerned about in relation to China. Indeed, over the next couple of quarters the Chinese authorities might ease its restrictive policy stance and lower official interest rates to support growth.
While the outlook for China remains very strong, one potential problem brewing is in Spain, where it was announced that they will be incapable of meeting their austerity cuts (totalling €15 billion) and the Budget deficit for FY12 will be larger than expected (5.8% of GDP instead of 4.4%). The outlook for Spain is reasonably bleak – unemployment is rising (to 23% and is around 50% in people under 25 years of age), credit growth is going backwards and the economic outlook is increasingly clouded. Indeed, the Spanish stockmarket is the only developed market which has recorded prices declines in 2012 (down 2.1%), compared to an average 11% rise in the broad European index, the Stoxx Europe 600 Index. The Spanish stockmarlet has subsequently erased all gains that followed the European Central Bank’s announcement, on 8 December 2011, of unlimited three-year loans for banks at below-market borrowing costs. Other signs of concern are Spanish 10-year government bond yields, which rose above Italy’s for the first time since August 2011, and Spanish banks having the second highest capital shortfall in the stress tests undertaken by the European Banking Authority in December 2011 (only Greece was worse). This is placing increased pressure on financial markets and analysts have downgraded the earnings outlook for Spain (by 10% to date).
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