Given the latest developments, it ironically looks like the Chinese economy is going to be back on its feet much quicker than most western economies. We would also like to point out that the Chinese stock market has been one of the "best" performing markets in March. Part of this development is due to the totalitarian regime in Beijing that can implement and order its citizens and companies to execute on certain measures and strategies far more efficiently than most western democracies. Also, all businesses in China are either directly or indirectly owned by the government and Chinese investors understand that any business can fall back on the government's balance sheet in times of crisis. This reduces the risk of investing in equities significantly since bankruptcies under extreme conditions are much less likely.
Therefore, and as previously announced, we recommend to start building-up an equity position in the Chinese stock market (including Hong Kong) of 2.5% for conservative, 5% for balanced, and up to 10% for more aggressive growth strategies over the next few weeks and months. Given the sinister unemployment prediction by the Federal Reserve in the United States, ranging somewhere between 30 and 40 million Americans who are likely to lose their jobs this year, we expect only a sluggish recovery after a likely recession in Q3 and Q4. Especially since the U.S. economy is mainly consumption driven and with almost one third of the American workforce likely to be out of a job, consumption and economic activity will suffer substantially. To the contrary, the Chinese government has been gradually opening their country for business again and domestic investors have already returned to the stock market in mainland China as well as Hong Kong. Even though a McKinsey analysis indicates that the Chinese middle class with a somewhat affluent consumer budget is likely to include a population of "only" 550 million within the next three years, out of a total population of 1.4 billion, the number is still almost one-and-a-half times the entire population of the United States. Hence, it is only a matter of time for China to become the largest domestic and global economy. Furthermore, even though a lot of public figures are now urging to bring production back to the homeland and reverse the global outsourcing trend we have seen over the past two decades, we are of the opinion that - once this is over - people will forget quickly and companies will fall back into the old pattern of producing where costs are the lowest and margins the highest.
Last but not least, we would like to make you aware that there seem to be some liquidity issues within the American banking system even though the Federal Reserve has basically guaranteed unlimited support to keep the U.S. banking sector afloat. However, it cannot be ignored that many companies have stretched their borrowing capabilities to the limit due to historically low interest rates and the stock market that had climbed from one record high to the next over the past four years, which constantly increased the value of the debtors' collateral and therewith drove-up loan amounts available to thousands of companies all across the nation. However, with the pandemic and the economic shut-down that followed, many businesses will have to file for bankruptcy and bad loans will be piling-up on the banks' balance sheets, especially with smaller community banks. Over the past couple of days, we have noticed that banks across the country have limited the ability for customers to withdraw cash to a few thousand dollars only, even though these customers typically had a lot more in cash on their accounts that should have been made available for withdrawal under normal circumstances. We believe it is important to understand that even with the government's liquidity measures in place, some banks can and likely will still default. Therefore, we recommend to not keep more than the FDIC insured maximum of USD 250,000 in cash at any U.S. bank and to invest any higher amounts in short term treasury bills for the time being.
Please do not hesitate to contact us if you should have any questions. Also, we are more than happy to support you with your liquidity management at U.S. banks.
Oliver E Hohermuth, Principal & Chief Investment Officer