Pro Perspectives 5/22/23

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May 22, 2023
Last week we looked at charts on Japanese and German stocks.  And we looked at the U.S. benchmark (S&P 500).  All continue to trade around technical breakout levels (you can revisit that Thursday note, here).
This is the Vanguard Total World ETF.  This too, after retracing to pre-covid levels, is at a similar inflection point.   

Interestingly, the chart on Chinese stocks looks like the inverse. 
As we know China is still recovering from the zero-covid policies (finally abandoned in December of last year).  But exports are well above pre-pandemic levels.  The economy is growing at near 5% (above estimates), which is fast relative to the rest of the world, but still in recession-like territory for China. And the PBOC is allowing the yuan to weaken, nearing the levels of the 2019 (trade war) lows — which is intentionally stimulative to exports. 
Add to the above, in the past two weeks, in a "reopening quarter" the big four tech constituents of this Chinese ETF (FXI) all beat earnings estimates.
Valuation:  The P/E of FXI is 11 (ttm).  The P/E of the S&P 500 is 21 (ttm).
All of this said, coming out of the Great Financial Crisis/ Great Recession, Wall Street told us the era of developed world dominance had come to an end, and that the future of investing was in China.  By 2010, it was obvious that China couldn't thrive while the Western world economies were suffering.
Here we are again, coming out of a global crisis, but this time Western world economies are dealing with booming, rather than busting, nominal growth. This should be a time for a booming bounce-back in Chinese growth — unless the Western world decides to push back on China's economic and geopolitical ascension (and related, power).
It may be the last chance. 
And based on the G7 leaders meeting that took place through this past weekend, it may be happening.
The G7 communique mentioned China 20 times.  That's the most since 2014 (when the communique expressed concerns about human rights, trade practices and military expansion).  This is the first time since 2019 (in the depth of the Trump trade war), that the G7 leaders said they would work toward "diversifying" supply chains, to reduce reliance on China.  They addressed Taiwan, human rights, China's ability to influence Russia, and the importance of "playing by international rules."
What did China think about this?  China's state-controlled media called the G7 meeting, an "anti-China workshop."
Now, keep in mind, China intentionally, and aggressively, ramped it's influence building in Western world economies over the past 15-year (post-GFC, particularly in Europe).  And with that, the approach on dealing with China has appeared influenced.  Mike Pompeo called China enemy number one.  In contrast, Biden has called China a "tough competitor."  This, as Xi has continued to explicitly state his goal of world domination.
So, with this G7 statement, maybe the G7 leaders are finally prepared to hold China to account on what they call "economic coercion" (a term, before this past weekend, which has never been used before in a G7 communique, related to China).   
And with that, maybe FXI (the Chinese stock ETF) is rightly  communicating the geopolitical risk (i.e. vulnerable to breaking down).