Why China is having such a deep impact on global equity markets
During the week, the Sensex lost close to 3000 points and the Nifty has now given up 10% from its peak. But the Indian markets were not alone. The virus pandemic has literally hit markets across the globe.
How the world markets fell
Some of the numbers pertaining to the fall in DJIA were staggering. The Dow lost nearly 10% in one week, the worst performance since the Lehman crisis. Even the NASDAQ fell sharply. But the US markets were not alone. The UK FTSE and the German DAX were also down more than 10% in a month as the Chinese virus threatened to spread its wings to Europe also. In Asia, the damage has been across the board with Japan and most of Asia taking deep cuts even as Australian markets sank. What explains the panic?
China is the new GDP driver
If you look at the $3 trillion accretion to global GDP each year, then China accounts for more than 33% of this growth in absolute terms. The reliance on China is huge both ways. Auto makers, luxury goods makers and mobile phone manufacturers count on China to sustain demand. There is also the supply chain issue. Sectors like auto, electronics, pharma and textiles rely heavily on cost effective from China. A virtual shutdown in China means all these inter-linkages get impacted.
China sets pace for commodities
The global commodity markets heavily depend on China. Let us look at oil first. China consumes 14 million bpd of crude per day and currently that consumption is down by 3 million bpd. That is taking its toll on oil demand globally and on oil prices. After all, China is the largest importer and the second largest user of crude oil. To that extent China is the swing consumer. The bigger problem is in industrial commodities like copper, aluminum, steel, zinc and iron ore. In all these products, China accounts for 50-60% of global consumption and a slowdown in China means that the prices of all these commodities on the LME get hit. That hits most of the commodity dependent exporters.
Coronavirus was just a trigger
At the end of the day, the Chinese virus syndrome was just a trigger. The basic problem was that global equities were awfully overvalued. For example, the Dow had given returns of nearly 30% in 2019, at a time when valuations are already so rich. The Nifty gave 13% returns and it was not even in the top 6 performing markets. Even as earnings have slowed, the equity markets are seeing asset price inflation due to a surfeit of liquidity over the years. The Chinese virus was just a trigger for a market that was already stretched to the hilt. Rich valuations have only served to magnify the China impact.
