(Bloomberg) — Global markets may fail to properly absorb the risks arising from China, as evidenced by stocks trading near record levels.
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The main challenge is China’s Covid-Zero strategy, which portends mobility restrictions, supply chain disruptions and disruption to trade, according to Francis Donald, global head of macro strategy at Manulife Asset Management.
“What failed to penetrate the sensitivity of markets is, how will Covid Zero in China affect the global economy?” Donald said in an interview with Bloomberg Radio on Thursday. “This is a global college story that is not being priced in, even if the bad news for China is right there in Chinese assets already.”
China is currently scrambling to rein in any widespread virus outbreak and is the last bastion of the Covid-zero approach to closed borders and movement restrictions. If the nation continues with this kind of containment strategy to fight the pathogen, Donald said, “We are likely to see PMIs slow, trade and commodity activity weaken as well,” referring to the PMIs.
The company’s latest results show the challenges arising from the Chinese Covid situation. Starbucks and McDonald’s in their latest earnings reported a drop in sales of comparable stores in China amid the pandemic-related mobility restrictions.
The MSCI AC World Index is up nearly 16% so far this year and is now trading near a record high. By contrast, China’s MSCI index is down 14%, due to Beijing’s stringent regulatory measures on a range of industries, including the debt-laden real estate sector.
Strong corporate earnings have encouraged the view that global stocks can weather the pandemic-related supply chain disruptions that are fueling inflation and pushing central banks toward tightening monetary policy.
For Jim Fino, head of fixed income Asia at Axa Investment Managers, headwinds from China’s real estate sector and the broader economic slowdown are key tests for investors.
He said slowing growth represented a “wild card” and “would have global repercussions”. “There is still a desire to reduce levels of influence in the economy through market mechanisms – there is a willingness to take on a little pain or spread the pain.”
Data released this month showed a sharp slowdown in Chinese growth to 4.9% in the third quarter of the previous year, compared to 7.9% in the previous three-month period.
(Company performance updates in the fifth paragraph).
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