Location, Trump and Covid-19 are the best that has ever happened to China

With the start of Q19, the focus was on the astonishing discrepancy between global economic, social, political and humanitarian losses from Covid-XNUMX and market response.

While recessions, almost zero economic activity and job losses have peaked in decades (i.e. unemployment or economic growth), asset classes on the markets have simply gone up. Some indexes, such as NASDAQ, reported record levels.

As an experienced volatility trader (nicknamed Vega) recently wrote in one of the macro groups: "You can be sure that this is the worst economic period in your life", therefore, perhaps we should not treat the stock market as a barometer of health, cracks and the potential catastrophe of the entire system. It is worth noting that this trader gained + 50% in the first quarter - he is definitely aware of the discrepancy between asset prices and the fundamentals of the economy.

As the world opens to the end, there will be some naturally easy profits and suppressed demand, but also the risks associated with the second wave of infections, further lockdowns, etc. My opinion is: the likelihood of another coordinated global shutdown is almost zero - economic costs , political and stability-related are just too high for almost all countries.

It is highly probable, however, that the global monetary and fiscal policy will remain loose and accommodative for a long time to come. Liquidity is currently the main driver of asset price increases, given that fundamentals are not even to mention. At some point, this situation will reverse, but it may not happen until 6-18 months or even in a few years. After Abenomice, index Nikkei gained around + 150% in three years.

All this, however, is obscured by the basic perspective of location, i.e. the reverse of globalization - promoted primarily by the Trump administration, but is currently gaining popularity all over the world and is almost certainly planned to be continued during Biden's term.

China grapples with the perfect storm in the form of adversity and challenges, including the cost of Covid-19, the deterioration of relations with Washington, the West's support for Hong Kong at Beijing's expense, and, when the dust settles from the pandemic, the global debate about who it is responsible for the present situation (something like the protests of the Occupy Wall Street movement x 1).

However, adversity will only strengthen the Middle Kingdom and increase its innovation, forcing it to realize its true potential. Trump and Covid-19 - this will be the best that has ever happened to China, and the positive net effects will translate into the rest of the world - because these factors will accelerate Beijing's plans for the transition from an export-dependent economy to domestic consumption. As a result, China's plans for 2025-2035, which are all about technology, will move up the value chain and develop technological infrastructure, and then take the lead. This will ultimately open Chinese markets and accelerate reforms hampered so far by export dependence.

In general terms, location will increase global competition. Globalization limits global competition: why strive for innovation when you can simply look for a cheaper producer?

Possible consequences of China's more local and domestic consumer economy are:

• Groundbreaking discoveries in artificial intelligence and autonomous vehicles on a scale impossible to achieve by any other country
• Innovations and renewable technologies (e.g. next generation nuclear power plants)
• The increase in domestic tourism in China plus the overall development of the tourism and hotel industry
• Chinese government and corporate bonds
• Chinese technology companies (long undervalued and performing worse than US companies)
• Hong Kong as a tide game (don't you want Chinese companies to be listed in the United States? No problem, they'll be listed in Hong Kong or Shanghai)
• Strengthening investor protection, governance and the rule of law to attract foreign capital

Countries that choose to ignore trade with 1,4 billion consumers and an economy that will become the largest in the world in our lifetime will face enormous costs. For others, however, it will be an advantage - for example, for Germany and the entire euro area, thanks to the capitalization of rapprochement with the Middle Kingdom.

Author: Kay Van-Petersen, analyst Saxo Bank