Caixin
Jan 19, 2023 01:58 PM
OPINION

Fisher: This Year Will Deliver a Big Surprise — and Big Returns — for Stock Investors

Photo: VCG
Photo: VCG

Say hello to a shocking 2023 that will deliver investors from Dalian to Dallas with relief from 2022 and big, beautiful returns. Expect Chinese and global stocks to boom as a bull market few can foresee delivers stunningly strong returns — 15%, 20%, 25%, maybe more, with China leading the way. Lingering worries on real estate and Covid cases climbing post-reopening — plus U.S. Fed paranoia blind gloomy Western commentators and investors to it. But their gloom is fertile soil for what lies ahead. It tees up positive surprise — relief — which will increasingly wash over markets. Let me explain and detail that

First, disclosure: My 2022 forecast proved mixed. Entering last year, I told you global stocks would grind sideways amid a scary market into the summer before roaring higher, notching double-digit 2022 returns overall. While stocks did strongly rebound late, I didn’t foresee their early weakness morphing into a bear market in the U.S. dollar, driving negative full-year returns. For Chinese stocks, I forecast your painful bear market would end sometime in 2022. While the run up to it wasn’t pleasant, the 38.2% rise since October 31 seemingly proved that true— and looks like a down payment on a bull market set to run into this year.

Few think it will. Most Western observers dismiss any rally or positive news as false. But that widespread view is the “Pessimism of Disbelief” I described on July 26. All stocks need now is reality slightly topping expectations — which remain dour.

In mid-2022, Western pundits argued Chinese stocks were “uninvestable,” citing Covid mitigation measures, uncertainty over regulation and the real estate industry’s issues. All have now changed, as you know. But bears now shriek that rising caseloads present a huge, insurmountable headwind for Chinese businesses. They forget other economies around the globe endured jagged initial reopenings before quickly adapting and resuming strong growth.

Stocks’ big rise since October, which persisted through rising caseloads, shows you markets didn’t forget, though. They remember that instructive recent past —while looking forward to a brighter Chinese future. In the three to 30 month timeframe they coldheartedly consider, stocks see the Hong Kong border’s reopening and scrapped quarantine rules for travelers as economic fuel. They look beyond inevitable initial case spikes and see normalcy returning — easing supply chain pressures that periodically flared after 2020. Trust them.

I have long argued that sentiment — not fundamentals — drove China’s 2021-2022 bear market. In 2023 that gloom should soften, underpinning stocks’ rebound. Take the renewed issuance of video game licenses. The industry alone never had the power to wallop China’s economy. But some Westerners saw the license freeze as a broader sign of rising uncertainty. The reversal brings some relief — as does approval of Ant Group’s recapitalization, especially given its troubles sparked part of the broader regulatory worries back in 2020.

Real estate? I told you last month new government measures would help stem problems. Since then authorities have further pushed to shore up some big developers’ balance sheets. Now they plan to relax the “three red lines” policy. As I have told you before, property market woes alone aren’t enough to doom China’s economy. Nevertheless, the raft of assistance will buoy sentiment, helping investors see through those false fears.

The inflation that dogged much of the non-Chinese world continues to slow, too — easing upward pressure on U.S. and other regions’ long rates … and the dollar. I showed you why the buck’s big rise — tied to U.S. Federal Reserve rate hikes — was a false fear back on Aug. 23. But it continues to impair sentiment. That will change soon. America’s year-over-year inflation is already down to 7.1%, two full percentage points off June’s peak. Month-over-month inflation has averaged a pedestrian 0.2% since then. That, along with relief over the end of “zero Covid,” helped reverse the yuan’s 12.9% slide against the greenback from 2022’s start through Nov. 3. Since then, it rebounded 6.7%. That should continue, quelling fears of a capital exodus from China.

Last month, I noted U.S. politics would prove a bullish global stock market driver in early 2023. Expect the benefits to start strong and last all year. America’s S&P 500 hasn’t suffered a negative third year of any president’s term since 1939, World War II’s start (and then only a drop of 0.9%), averaging 18.4% dollar returns since good data start in 1925. Better yet? The nine negative second years of presidents’ terms (like 2022) further turbocharged third years, garnering median 28.7% dollar returns. And the first half is traditionally stronger still. There hasn’t been a negative first half of any president’s third year in the history of the S&P 500 except 1939. We’re not about to start world war now. You know well Chinese stocks don’t always follow America’s — 2021 showed that. But they move together more often than not, with a 0.49 correlation — important given 1.0 signals lockstep movement and -1.0 indicated polar opposite.

But global recession is coming — or here, shriek bears, claiming this will crush China’s exports. Maybe. Most economic data globally are mixed and lending remains robust, though — incongruous with major contraction. Regardless, what has changed since my Nov. 3 column detailing China’s ability to weather a global economic downturn? CEOs have had more time to prep for recession, lessening the potential severity. Anticipation is mitigation, always.

Traditionally, what a recession is about, primarily, is to fix excesses and inefficiencies built into the economy during an expansion to build the baseline for the next expansion. But business everywhere started doing that this last spring and do it more feverishly every month.

A KPMG survey shows nearly two-thirds of Asia-Pacific chief executives expect a recession — and about as many have already taken precautions. A Conference Board survey found 98% of multinational CEOs see U.S. recession ahead — 99% foresee European contraction! Hence big U.S. tech firms are continuing their 2022 layoffs in 2023’s early days — getting themselves shipshape. About a third of big multinationals are slashing ad budgets — with three-quarters putting spending plans under heavy scrutiny, the World Federation of Advertisers said. Companies are getting lean and mean — leaving little more excess to wring out, if a recession officially arrives.

Regardless, this global recession — if one occurs — has been the most widely anticipated in my 50-year career. Certainly it is the most widely anticipated one in measured history data-wise. Normally recessions surprise everyone and we don’t know we’re in one until we already are. Now it’s anticipated. That has to make it milder or non-existent. Stocks, including China’s, have surely pre-priced its potential risk. But very mild or no recession would be a huge positive surprise. Even a shallow recession surely exceeds expectations, bringing relief.

That relief should propel a worldwide bull market in 2023, with China leading. What falls most in bear markets usually soars highest in rebounds. I don’t have to tell you China’s downturn was longer and deeper than other countries’ declines—largely because of its big Tech bent. Chinese tech stocks fell as much as -60% after the bear market began in 2021. Tech-like communication services firms were even worse, plunging over 70% before October’s reversal. A rebound turns that weakness into strength.

After nearly two gloomy years seeing a brighter 2023 isn’t easy. But stocks’ recent rise shows they are coolly looking past lingering fears to better days. Think like they do. Position now for a great and hugely unexpected year of relief, recovery and positive surprise.

Ken Fisher is the founder and executive chairman of Fisher Investments.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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