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Wall Street Loves China Right Now, And Will Love It More If Biden Is President

This article is more than 3 years old.

Wall Street loves China right now. Especially active fund managers.

Here is a look at how weighting in China has increased. This is especially true among emerging market specialty funds, and institutional, global investors. The Robinhood investor has not yet really discovered China. But they will, especially after as we get closer to the presidential election.

“Overall, most Americans are grossly underweight China,” says Cameron Brandt, director of research at EPFR Global, a fund flow tracker in Cambridge, Massachusetts.

On Wednesday, the first day of July, the Shanghai Stock Exchange said it hasn’t got time for the coronavirus pain. It rose 1.38%. The CSI-300 rose 2.01%.

As an investment, China is the best emerging market in the world.

“They’re seriously the one ones with positive year-to-date performance, despite all of the stresses caused by the pandemic and trade war,” says Ryan Nauman, a market strategist for Informa Financial Intelligence in California.

This is now. What about in the not-so-distant future? Markets like pricing things out a few months, if not a year. It’s an election year in the United States and former vice president Joe Biden is in the pole position. If elections were held today, he wins.

Jim Rickards, a contrarian financial analyst and pundit who has done some work with Hedgeye recently said this week that he predicts Biden wins, regardless of what the polls are saying today. Rickards called the Trump presidency in 2016 when Hillary looked like a runaway train. Now he thinks it’s Biden’s turn, based on Trump’s approval rating in key battleground states.

Wall Street is pretty certain that a Biden victory ends tariffs on China. There is no clarity on the ongoing tech decoupling — with Huawei and ZTE being called national security risks yesterday by the FCC and TikTok in the crosshairs of being outright banned in Apple AAPL and Google GOOGL app stores — but a more conciliatory tone is probable with Biden. If China had to pick a player, everyone knows it would be Biden. He is a return to the status quo. If not a full return, a dial back.

A Biden win would be great for China stocks, and there is a chance, though no one knows how great it is, of course, that some in the market are starting to price this in.

With Biden, there are no new tariffs, and if he follows the Trump Administration on Hong Kong, support for the pro-democracy movement is more rhetorical than actual punishment against Beijing. The U.S. recently removed some special trading status with Hong Kong, but it was not a sweeping change. It only affected some tech products and defense products.

Biden’s China relationship could also go off the rails if there is a perceived benefit in Washington for going after Beijing for its treatment of the Uighur Muslims in eastern China, or punishment for contributing to CO2 emissions into the atmosphere, an environmental problem. Previous Democrat administrations did not do that, but Trump may have set the table for those things and Biden may pursue them if Washington needs to play hardball with China at some point in his presidency. It’s something worth gaming out, and will be gamed out by the quant funds looking for signals, if Biden wins.

For sure, human rights is not a huge headwind for the majority of China stocks. So all told, Biden putting an end to trade war tariff escalation will be a positive for emerging market investors who are going overweight China into the second half of 2020.

On the economic front, China is clawing back from the brink of its home-grown viral pandemic. It’s not cured.

Few trust China’s coronavirus data. Markets are left to dig into the economic fallout, lest they are to believe that only around 88,000 people in all of China contracted the coronavirus.

“Some data in China we feel we can trust and other data we don’t think is reliable,” says Andy Rothman, an old China hand at Matthews Asia, and an investment strategist for their Asia funds based in San Francisco.

“We have a better ability to double check China’s economic data than we used to. We have companies like Nike NKE that have reported 22 quarters of double digit revenue growth. We can look at data from Qualcomm QCOM , from Tesla TSLA sales in China,” he says. “We know the official unemployment rate is not reliable at all because the methodology they use is terrible and they even acknowledge that. You have to approach China the same way you approach data anywhere – verify before you trust. We have a team that is kicking the tires there everyday,” he says. “We are talking to company suppliers, customers and competitors to see if what these companies are saying is true or not.”

Hate China or love her, money is flowing in. The trade war didn’t stop portfolio flow from going there, nor did the pandemic.

Supply chains will shift away from China, and that is a headwind. But in the meantime, Wall Street is still putting money to work there, much of it mandated due to new weightings in the major indexes tracked by the popularly traded exchange traded funds and emerging market equity mutual funds.

China is not licked yet. It may never be.

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