Markets have been snapping back and forth in recent weeks in a somewhat elusive search for equilibrium. With summer trading volumes thinning out, it has not been surprising to see volatility move up a gear with markets switching between concerns about the impact of the Delta variant on economic growth and, on the upside, robust company earnings reports. Adding to this mix is the resurfacing of one of the perhaps long forgotten risks attached with investing into emerging markets, asset appropriation or overnight policy change.
The surprise move by the authorities in Beijing to introduce additional regulations for internet companies and, in particular the booming after school tutoring market (AST) in China, has deeply unsettled investors. Quite literally overnight, a burgeoning educational sector has been moved to a status of “not for profit” leading to a destruction of investors’ capital. One of the attractions of emerging markets, such as China, has been that as populations move from a lower income bracket to a middle-income one, they tend to upgrade their purchases to higher quality discretionary goods and services. This is likely to mean higher growth rates for, amongst other things, educational services as parents and individuals aspire to advance themselves through educational learning.
Since the start of the Covid-19 pandemic, China, like many other counties around the world, has seen aspects of daily life change. In particular there has been a surge in e-learning, which in turn has attracted investors and capital to the AST sector; worth over $100bn before the policy change announcement.
Beijing though has taken a different view and developed concerns that this trend will lead to an uneven distribution of education resources between urban and rural areas and that vocational training is better aligned with the country’s vision for the future. On the other hand, critics have suggested that one of the real reasons for the policy change has been fears within the Chinese Communist Party that e-learning would allowing Western ideas about democracy to creep in via the backdoor. Whatever the true motive of the Chinese authorities, investors have found themselves caught in the eye of the storm. With speculation that Chinese healthcare stocks might be next in the firing line, investors should heed “the smiling tiger”.
Looking at the week ahead, the US earnings season moves into full swing with a quarter of the constituents of the S&P 500 reporting their financial results. A real cross-section of companies will be reporting numbers, including names from the financial sector, consumer staples, travel and media. With the inflation story never far away, investors will undoubtedly be paying close attention to what management reports regarding the impact of rising costs due to supply chain disruption alongside all-important updates on reopening activity. On the economic front, the key number is going to be Friday’s release of the all-important employment data in the US. Consensus expectations have suggested that job creation has heated up in the US but with investors fretting about the economy getting too hot or cold, it is unlikely that the trees will remain silent.
