Investing.com – China has increased tension on the world economy with its slowdown. The vision regarding the recovery of the Chinese economy took a different direction in light of the optimistic perspectives with the abandonment of the covid-zero policy at the beginning of the year. Cuts in projections by banks, economists and analysts indicate an increase in pessimism, with greater fear that the second largest economy in the world will not meet its projections, despite support measures, and that risks of contagion will materialize.
With a population of almost one and a half billion people, analysts were constructive at the beginning of the year with the thesis of the potential for reopening, which has been proving to be below expectations. But this year has been one of bad news, with activity expanding slower than expected, record unemployment among young people, a weaker currency and a severe crisis in the real estate sector, which, until recently, represented a third of the country’s entire wealth. .
Still, economists and analysts consulted by the Investing.com Brazil They believe that, although the prospects are not as favorable as previously expected, the adjustment in the pace of growth is far from being a total brake on the economy and that Brazilian exports should not experience major fluctuations. Therefore, there are few suggestions for changes to the portfolio, despite the indication of greater care with assets exposed to the Chinese thesis.
“Time bomb” and end of “heroic growth”?
China’s heroic growth has come to an end, said economist Paul Krugman, winner of the 2008 Nobel Prize in Economics, in reference to the years of double-digit expansion in activity. Meanwhile, the Financial Times published an article stating that the accelerated collapse of the Chinese real estate sector threatens other markets and nervousness about the risk of contagion could affect commodities. The President of the United States, Joe Biden, considered the Chinese economy a “time bomb”.
With projections falling and pessimism rising, the experts consulted by Investing.com believe that it is unlikely that this time bomb will actually explode, but highlight that the challenges are many, given the weakening of domestic demand and the negative perception of the real estate sector, which has high debt, leading to liquidity problems for companies such as giant Evergrande (OTC:).
To try to mitigate the situation and pursue Beijing’s projection of 5% economic growth this year, China cut interest rates and reduced regulations for home purchases. Even so, Chinese families – who have more saving characteristics – remain cautious, lowering the prices of new homes.
In the opinion of economist Livio Ribeiro, researcher at Fundação Getúlio Vargas (FGV) and partner BRCG, specialist in China, the Asian giant’s economy has been presenting serious problems in its growth dynamics in the short term, at least since April, and the most negative month it was May, in his view. From then on, especially in July, the market’s reaction seems somewhat uncoordinated, you understand, when pointing to a subsequent recovery. “Both panic and relief derive from insufficient coverage of what is happening with China. So, in our view, the Chinese economy will have difficulty growing at a robust pace due to cyclical and structural reasons”, he points out, with the expectation that the Gross Domestic Product (GDP) will expand at around 4.8% to 5%.
Ribeiro believes that, despite a slowdown in Chinese growth, Brazilian exports will have numbers close to last year, with lower imports and a record trade balance. “Some issues, in the Brazilian case, are more structural, such as the rise in exports, where China has great relevance, but other markets have taken its place.” As for , Brazil has increased exports, despite the slowdown in the real estate market, according to the expert, due to the replenishment of stocks.
Chinese activity continues to show signs of weakening, but the most recent figures indicate a somewhat more promising scenario, according to Ribeiro. The reality, according to him, would be more disconnected from the exaggerated pessimism of headlines.
Empiricus estimated that a further recovery in consumption would actually take longer, with China’s greater propensity to save and caution in the face of recent measures. In other words, a delay in the results of the resumption and stimuli was already predicted. As time went by, the situation became worse, with construction leverage problems once again permeating the situation in China. “Without the civil construction engine, China found itself somewhat hampered and without the capacity to continue expanding its investments. In a way, the Chinese economy stopped, in quotes, in these first six months.”
It seemed that China would gain momentum again this year, with euphoria in relation to tourism – and that the problems associated with civil construction would have systemic risks alleviated. Economic indicators continued to slide, with the trade balance cooling and devaluing. Families still do not feel comfortable consuming their savings and making new investments – given the losses in the real estate sector.
In addition to the deepening of the fight with the United States and greater competition in semiconductors, the brutal devaluation of Japan’s , gave space for the player to boost its trade balance – penalizing Chinese exports. China lost market share to European markets in the post-pandemic scenario, to add to the situation.
Gabriel Mota, from Manchester Investimentos, states that there is great difficulty in predictability for Chinese data and the market views a lot of information with a certain amount of skepticism. Even with the difficulties, even though the relative growth compared to the past is lower, the economy is growing strongly, he considers.
Allocation given the scenario
Ribeiro does not believe that sectors more exposed to China will enter a negative spiral, but the moment is of less momentum for the Asian giant. In other words, “it is not necessarily such a negative scenario that it will make us change our minds, but it will require a more detailed analysis on the part of investors”.
Regarding the perception of Vale’s (BVMF:) shares in this context, Ribeiro reinforces the tendency to rebuild iron ore stocks. “They are discussing a resilience that, in fact, is not a resilience”, he points out, remembering the company’s monopoly and that of other giants such as BHP and Rio Tinto (LON:), but considering that China can exercise its power to form prices.
João Piccioni, analyst at Empiricus Research, recalls that one of the analysts’ bets was on Booking’s shares, but the recommendation is now based on the migration of the China vector to an increase in Americans going to Europe. Furthermore, Empiricus recommended a Chinese ETF linked to the domestic economy, with investments in listed local shares, such as supermarket and restaurant chains. Throughout the semester, with the change in perception about the Chinese economy, he changed his position to Japan, which he considers more promising at the moment.
In relation to the Brazilian vectors for the thesis, Empiricus remains contrarian with Vale’s shares, which it considers to be cheap. “Vale is being traded at very interesting multiples, it has this whole story about the margin of safety, the ability to distribute dividends. But another point that we need to keep in mind is the advancement of other Asian economies, such as India, which will demand a significant volume of steel and one of the main exporters of steel to India is precisely China”.
Manchester understands that investors’ fears occur because projections were for a robust recovery after the easing of zero-covid measures, which did not happen, penalizing securities linked to the country.
“We see that some assets that are related to China, such as Vale, are depreciating beyond what they should be, so there is room to perform, but pricing in China should be a little more cautious”, he advises, because after all the perception that the economy would move forward after the zero-covid measures, the numbers have not yet appeared.
“Depreciated assets that need China, such as Vale and JBS (BVMF:), are still very discounted and have legal space to perform well. For us, the price is already higher than it should be. And that opens up opportunities.”
However, Manchester does not recommend changes in allocation and Vale remains in the recommended portfolio. “This whole scenario does not discredit anything for our stock exchange in Brazil and other assets can pull the index”, he adds.
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