Diverging global equity market performance.

One major dynamic worth reiterating as we near the end of 2023 is the continuation of underwhelming Chinese economic and market data. Due in part to Omicron lockdown related comparisons, Chinese economic data was supposed to experience a robust rebound and help lift global activity in the second half of the year. With that setup in mind, we were watching for positive follow through from Chinese economic data and equity performance alongside improving data from major countries like Japan, Germany, and the United States.

What we saw from China was lackluster growth, inflation data consistent with prior recessionary periods, and YTD equity performance via FXI registering -15.2%. In Japan and Germany, despite decelerating economic activity, Japanese equities (EWJ) are up 18.4% and German equities (EWG) are up 22.5% on a YTD basis. The Japanese and German macro and equity performance relationships highlight an important reality – economic data and market performance can at times, and at different parts of a full economic cycle, diverge. In the U.S., we saw GDP accelerate to 3.0% y/y and domestic equity performance via SPY improve to 24.4% YTD.

One of the big themes we will be watching for in 2024 is the domestic impact of weak economic activity from abroad. If China was once a primary driver of global growth, and in this moment that critical player is not accelerating at prior growth rates, how are U.S. businesses that rely on revenue growth and production activity within China impacted?

Over the next few months, we will be watching to see if Japanese and German equities move lower, more in line with their current economic setup, or move higher and economic activity reverses its current trajectory. As for China, if economic activity was going to improve, we would expect to see FXI improve in coming months. Lastly, if economic activity in China, in addition to Japan and Germany, continue to decelerate, we believe the U.S. economy will likely have a tough time remaining isolated from that weakness. Therefore, we will be watching to see if SPY moves lower ahead of a potential slowdown in economic growth and inflation or continues to march higher despite those global headwinds.

Source: Macrobond. 

Source: Koyfin. 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.