S&P 500 hits all-time high

S&P 500 hits all-time high

Stock markets have continued to develop unevenly in 2024.

In this article, we’ll talk about how Nasdaq Helsinki is likely to attract more takeover bids this year as stocks flatline. After that, we’ll turn our attention to China for a change, where the economic development is less than inspiring. Because of the weak domestic economy, Chinese companies are trying to dump their excess production overseas, which is increasing competition and causing the rest of the world to resort to protectionism in response.

The S&P 500 hits record high 

The world’s most important stock index, the S&P 500, has risen by a few percent since the start of the year, reaching new all-time peaks. The bear market had an almost U-shaped decline and rise. At the beginning of 2022, stocks started to collapse as interest rates rose sharply. Now the upward rally has been fueled by the expectation that interest rates will fall as inflation stabilizes.

While the tech giants have stolen the spotlight of the rally, the rise has actually been quite broad-based. For example, the stock of Berkshire Hathaway, Warren Buffet's collection of old-economy companies, is also higher than ever.

Then again, if inflation is taken into account, the S&P 500 index is still 10% away from its all-time highs in real terms.

While there’s generally no reason to be pessimistic about equities in the long run, new peaks do not always indicate that the bull market will continue. In 2007, for example, new peaks were only a momentary consolation before the severe collapse of the financial crisis.

Not every stock market in the world is in the midst of a rally: The Chinese stock market has fallen by 10% since the beginning of the year. In Finland, too, the general index has already dropped a few per cent below zero.

More takeover bids likely on Nasdaq Helsinki

Last week’s big business news on Nasdaq Helsinki was the tender offer for the SaaS company Efecte for a price of EUR 15 per share, offering a premium of almost 100% compared to the closing price the day before the offer. Our analyst Antti Luiro found the offer attractive and it’s expected that the investors will accept it. Efecte’s share has roughly tripled during its stock market journey which began at the end of 2017.

Efecte is one of the many small companies on Nasdaq Helsinki that experienced a growth bubble during the pandemic. The valuation of the share – only two times the company’s revenue – was not overwhelming after the bubble burst.

I wouldn’t be surprised if more bids like the one for Efecte were to follow on the stock exchange this year. As I have emphasized many times before, the valuation levels on Nasdaq Helsinki are cheap. Even though it’s easy to belittle the Finnish stock market, we actually have a lot of companies that are of high quality in their selected niches. Last year, there were buyout offers for the pet supplies company Musti Group and plumbing and heating systems maker Uponor, among others. If the stock market stays on the discount mode, there's bound to be unforeseen tender offers. As portfolio manager Mika Heikkilä pointed out on X, the stabilization of financial conditions and the horizontal development of prices will get buyers moving.

 

China’s troubles are spilling over to the world

China’s economic troubles threaten to spread around the world. Because domestic demand is in a lull, Chinese companies are unloading more and more goods abroad, which is exacerbating competition and fueling friction in international trade.

According to statistics released last week, China’s economy grew by 5.2% in 2023, as expected. The Communist Party’s growth target was about five per cent, and what's more, the Chinese Premier was quick to announce in Davos the day before the data release that the country’s GDP target had been met.



There are two things to remember when looking at China's economic figures. First of all, they cannot be trusted. Secondly, while in normal countries GDP growth statistics reflect the organic growth of the economy, in China the growth rate is a predetermined political decision. As long as you take on debt for insane investments, GDP growth can be anything you want, even if it is ultimately not sustainable growth.

The good news underneath the figures was the recovery in domestic consumption. Investments also made positive progress, excluding the reduced investments in the collapsing real estate sector.

The Premier bragged that China had achieved its growth target without traditional measures such as deficit spending. But that isn’t the case. According to Bloomberg’s calculations, the country’s debt-to-GDP ratio rose from 272% last year to 286% at the end of the fourth quarter. Addiction to debt is strong, despite the official reticence on big stimulus.

China is also facing deflation, i.e., a fall in the overall price level. The overall price level of the country has decreased on an annual basis since fall, reflecting the sluggish economy. The period of deflation has been the longest since the financial crisis. The fall in prices is psychologically problematic because it rewards delaying purchases. One person's consumption is another person's income. If the Chinese start to save more in anticipation of cheaper prices in the future, they will effectively cut income from others, further deepening the economic malaise.

Additionally, the meltdown of what is reportedly one of the biggest real estate bubbles in history also continues. The country’s housing market is massive and regulated, making it difficult to get a clear overview, but the prices of old dwellings in a data set of 70 cities are dropping by around 4% per year. New house prices have also been sliding for a long time. The lion's share of Chinese household wealth is in housing, so falling prices do not encourage consumption. In addition, a huge amount of financial activity has revolved around real estate being built with debt. Now the payback for this creation of imaginary wealth is surfacing as a terrible economic hangover. This is why Chinese property developers struggling with debt are making headlines here and there.

Even the Chinese stock market is suffering. The stock exchanges in China are in the doldrums, and their valuation levels seem cheap on the surface. But investors have shied away from China stocks in recent years because of a lack of confidence in the protection of private assets. The front-runner for the next President of the United States, Donald Trump, has already taken credit for the recent decline in China stocks because his China-policies are notoriously vicious.

After years of plateauing, Chinese stocks are now ridiculously cheap, so the market can be an interesting place for speculators to explore opportunities. In the light of current knowledge, it is difficult to see the country as a viable investment in the longer term, though. 

As I have often said, China's strict regulations are protecting the country from falling into a financial crisis despite the real estate problems. The weak state of the economy is instead reflected otherwise in the global economy and stocks.

China is an important market for European companies, Finnish companies included, such as KONE, which gets a third of its revenue from China. As I have previously pointed out, as much as 460 billion, or on average one fifth, of the revenue of the largest European companies came from China in 2022. China's weakness is visible and felt in the European stock markets, too.

Since there is not enough domestic demand for the surplus production, Chinese companies are trying to pour their products on world markets. In Europe, for example, authorities are investigating import tariffs on Chinese electric cars because competition is distorted by the generous production subsidies in China. I asked analysts about this, and Finnish companies such as Wärtsilä and Metsä Board have reported on Chinese price disruptors. Also operating In China, Detection Technology and Vaisala have shared their experience of increased competition. Additionally, The EU and the US are jointly exploring measures to stop the dumping of underpriced Asian steel.

In conclusion, China's attempt to stimulate its own economy through exports at the expense of others may only fuel protectionism elsewhere in the world. In the US, for example, containing the Chinese threat has become a central issue in the political debate, fostering populism and a hardening foreign policy in the form of a trade war. It is clear that a protectionist world is not the most sustainable place for trading and stocks in the longer term.

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