China Is This Year’s Downside Outlier For Global Stock Markets

The iShares MSCI China ETF (NASDAQ:MCHI)) is down more than 13% year-to-date. Weighing on sentiment is Beijing’s ongoing regulatory crackdown on the country’s high-flying tech firms. The sharp policy shift raises concerns among investors that growth opportunities will be pinched for the country’s tech sector, and perhaps in other industries in China.

Some investors see opportunity in beaten-down shares, but there’s still a wide-ranging debate as the market prices in higher uncertainty driven by the vagaries of Beijing’s evolving policy agenda. “If many of these firms are being brought to political and regulatory heel, they shouldn’t trade as growth stocks, in my opinion. The valuation shift should be permanent,” says George Magnus, former chief economist at UBS and author of “Red Flags: Why Xi’s China Is in Jeopardy.”

The blowback from the change in risk outlook for China has had minimal impact on other markets in Asia, but holding a basket of stocks targeting the region has still come at a price. Consider, for instance, the iShares MSCI All Country Asia ex Japan ETF (NASDAQ:AAXJ), which is down 2.5% this year. Nearly 40% of the portfolio is allocated to China, which explains the fund’s weakness.

By contrast, iShares MSCI Japan ETF (NYSE:EWJ) is up 1.4% year-to-date. Moving beyond Asia reflects much stronger returns, led by US stocks via SPDR® S&P 500 (NYSE:SPY), which is ahead by 20.9% year-to-date. Shares in Europe are a close second-best performer in 2021: Vanguard FTSE Europe Index Fund ETF Shares (NYSE:VGK) is up 17.3% this year.

On a global basis, stocks continue to post a strong gain for 2021: Vanguard Total World Stock Index Fund ETF Shares (NYSE:VT) is up 15.3% this year.

Looking at the funds listed above through a momentum lens suggests it’s time to manage expectations down for global stocks generally. The case for a bit more caution is based on two sets of moving averages.

The first measure compares the 10-day average with its 100-day counterpart—a proxy for short-term trending behavior (red line in chart below).

A second set of moving averages (50 and 200 days) represent an intermediate measure of the trend (blue line). Using data through yesterday’s close shows that the recent upside momentum trend continues to weaken and so there’s a case for anticipating a more challenged environment for stocks in the near term.

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