Caixin
Jan 23, 2020 07:00 PM
OPINION

Ken Fisher: After Big 2019, China’s Bull Market Has Plenty of Room to Run

2020 may not bring 20% or more, but with no sound reason for bearishness, you should be bullish.
2020 may not bring 20% or more, but with no sound reason for bearishness, you should be bullish.

So much for bull markets dying of old age! This nearly 11-year-old global bull just notched a 29.2% gain in 2019 — its biggest year since 2009’s initial rebound from the global financial crisis. Chinese stocks were even better, with the CSI 300 index up 39.2%. Great! But there is more good news: While gains may slow, the reality is that there is little in 2020 to stop Chinese and world stocks from climbing higher.

Globally, most disagree. They argue 2019’s big run is overdone and can’t last. Western pundits point to international tensions and tepid global growth. They claim these are “negatives” investors overlook. America’s election adds another wild card. On China, they fret about slowing growth and allegedly troubling corporate debt levels. So why not sell, “lock in” gains and dodge the impending slump?

Here’s why not: Markets don’t work like that. For one, big years don’t doom stocks. MSCI Inc. has published its All-Country World Index (ACWI) in yuan terms since 1994. Over that span, it climbed 20% or more five times prior to last year. While return magnitude varies, global markets rose the following year four of those five times. The sole decline was in 2000, as part of a broader global bear market.

Naysayers might argue that isn’t very much data. Fair point. But broader datasets show the same. MSCI has ACWI data in US dollars dating to 1987. Over that span, there were nine annual gains of 20% or more. Stocks rose the next year seven times, with 2000 and 2018 the only exceptions. Even taking the longest possible view — using America’s S&P 500 in US dollar terms — shows big years don’t mean trouble looms. From 1925 through 2018, US stocks posted 20% gains or higher in 34 calendar years. They rose the following year 23 times, or 68% of the time. That’s right in line with stocks’ tendency to rise about 70% of the time in the long term.

Even when a strong year preceded a drop, those big positive years weren’t the cause. Bull markets die one of two ways: They are either walloped by a huge unforeseen negative, wiping trillions off global GDP — or, more often, when euphoria reigns. 2000 was a classic example of the latter, especially in America. Previously timid investors piled into undiversified speculations on tiny tech firms they didn’t understand — often IPOs of firms with no corporate sales but high market valuations. Pundits presumed the “new Internet economy” meant profits didn’t matter, only clicks, burn rate and lofty future visions. Fear of a downturn vanished, right while one was building. Few saw America’s inverted yield curve. Those junk IPOs allured many, swelling total equity supply. Euphoric investors couldn’t see a bear hiding in plain sight.

Today, few signs of a market peak exist for world stocks. Global IPO performance has been weak. Stock-based M&A isn’t surging. Investors have cut margin debt. Americans yanked a total of $192 billion from equity funds last year, despite big stock market gains. No one says the world is in some new and different permanent boom. Euphoria? Now? Ridiculous!

Now, many Western pundits would dismiss all that for China, seeing the country as isolated from global markets. But Chinese A shares and the MSCI ACWI index of total world stocks have a correlation of 0.34. Considering that 1.00 would imply identical movement and -1.00 exactly opposite, this shows that global trends do matter in China. This is no shock, considering that China is such a huge driver of global demand and increasingly open to the world. What’s good for the world will likely be good for China too — and vice versa.

The “risks” most envision actually set up bullish surprises for China in 2020. Pundits warn of a Chinese “hard landing” — the idea that, after years of booming growth, China’s economy is destined to crash to earth. They think upticks in corporate debt defaults indicate it’s coming soon.

But hard landing fears have existed for a decade. While growth rates have slowed — no country can sustain 10% growth forever — we haven’t seen anything close to a crash. In 2014, Chinese GDP grew 7.3%. Through the first three quarters of 2019, it was 6.2%. Let’s pretend it finishes the year at that rate. A 1.1% slowdown over five years to still-swift 6% rates is hardly a “hard landing.”

As for those rising corporate defaults, like the missed interest payment by Hohhot Economic and Technological Development Zone Investment Development Group Co. Ltd., a local government financing vehicle in the capital of the Inner Mongolia autonomous region? As I wrote last month, those fears are very wrong. In the West, rising defaults could be a sign of trouble. But in China, the slight increase signals Beijing’s commitment to reform and openness. The government could bail out the defaulters, but instead it is letting market forces take hold. Over time, that commitment will lead to more investment, efficiency and productivity. It is a major positive few see. Eventually everyone will. False fears like this are bullish, generating a relief rally when reality disproves them.

Those global economic risks look faulty, too. Take early January’s tensions between the US and Iran. Initially, they caused oil prices to spike. Some feared war would wallop markets. But all-out war is unlikely — and even if I’m wrong, a long history of many such events shows Middle East conflicts don’t cause bear markets. As for oil, as I showed you here in July, it lost its power to sway economies long ago. In China, domestic shale reserves are the world’s third-biggest, trailing only America and Russia. Producers have only begun to tap this huge domestic potential, which should speed up in future years, given the government recently invited more global firms to participate.

Politically, fears over America’s November presidential election loom large. Hedge fund types warn this-or-that Democratic candidate may squash stocks. The crowded field stokes uncertainty. This is quite typical. Uncertainty usually weighs on returns early in election years. But it falls later, as the race crystalizes — bullish. Hence, in dollars, US stocks have risen in 83% of election years since 1925 — averaging 11% gains — the bulk coming as the vote nears. Like the ACWI, Chinese markets move alongside America’s more often than not.

Returns may not be as big in 2020 as they were last year. That’s ok. But with the global economy healthier than appreciated and false fears abounding, the CSI 300 seems poised for another good year. 2020 may not bring 20% or more, but with no sound reason for bearishness, you should be bullish.

Ken Fisher is the founder and executive chairman of Fisher Investments, a money management firm serving large institutions and high net worth individuals globally. He is the author of the books “Super Stocks” and “The Only Three Questions That Count.”

If you want to submit an opinion piece to Caixin Global, please contact editor Lu Zhenhua (zhenhualu@caixin.com)

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