Equities vs. Bonds? Look to China for Clues

Chinese stimulus could be instrumental in deciding which investors are proved right.

These days the investing world seems split between two types of market participants: the believers and the skeptics.

Firmly among the believers are investors in equity markets, which have rebounded sharply from their sell-off in late 2018, supported by a dovish pivot by the Federal Reserve, hopes of a trade-war truce between the U.S. and China, and the U.S. government going back to work. Yet this rally, with the S&P 500 up almost 20% since the low on December 24, has occurred even as companies’ 2019 earnings have been revised markedly lower.

Moreover, while the equity market has rallied so far in 2019 (see Figure 1), U.S. Treasury yields have declined, reflecting a skeptical view. Equities have tended to benefit from falling yields increasing the present value of future cash flows. Bond markets, however, have started to price a Fed rate cut within the next 12 months, suggesting many investors see a downturn or recession in the foreseeable future. And a recession isn’t good news for equity markets: Historically, the U.S. stock market (S&P 500) has fallen an average of 27% (peak to trough) during recessions.1  

Figure 1 is a line graph showing returns for five global equity market indexes, from January 2018 to January 2019. The MSCI World, S&P 500, MSCI Europe, Nikkei 225 and MSCI EM all rebound from lows in late 2018. All of the indexes move in similar directions over the time period, with the S&P 500 the only index to break even. The Nikkei lost 10%, the MSCI EM about 7%, and the MSCI World and MSCI Europe around 5%.

Recent data releases bolster the cautious economic outlook: They indicate the global economy is slowing meaningfully, and many global growth forecasts have been revised downward as well. This is not surprising to us as we’ve expected a growing-but-slowing global economy for some time (see PIMCO’s December 2018 Cyclical Outlook, “Synching Lower,” and May 2018 Secular Outlook,Rude Awakenings”).

As one looks forward, what are markets telling us? This is where market participants differ. The recovery in stocks suggests some have already bought into better days ahead, while fixed income markets suggest others remain skeptical.

China, the decider?

We will be discussing the near-term outlook for the global economy at our next Cyclical Forum in March, in which PIMCO’s investment professionals from around the world will gather in Newport Beach to debate key factors likely to contribute to, or detract from, growth. We will publish our comprehensive outlook on global markets and economies after the forum. For now I share a few thoughts on China, which will be high on our list of factors to discuss for several reasons, including the somewhat limited scope for upside surprises in the U.S. and Europe over the next six to 12 months.

Chinese authorities have embarked on an enormous program of both monetary and fiscal stimulus, which could lift market sentiment. For example, new credit creation surged to a record high of 4.6 trillion yuan (CNY) in January (see Figure 2), exceeding levels reached in 2015–2016 (albeit under the People’s Bank of China’s old measure) as policymakers look to stimulate the economy. Recent data out of China suggest that these measures may be bearing fruit: Chinese New Year retail sales came in at +8.5% year-over-year (yoy), January exports jumped 9.1% yoy and Chinese aggregate credit creation grew 11% yoy (credit and export data from Bloomberg). Unlike past Chinese approaches, which were more focused on demand (“shovels in the ground”), this stimulus is supply side driven, so it’s hard to know what the ultimate multiplier effect might be as there are no precedents.

Figure 2 is a line graph showing the amount of new credit creation in China over the time period 2010 to 2019. The graph shows new credit creation surging to a record high of 4.6 trillion yuan in January 2019, exceeding recent peaks of roughly 3.5 trillion in 2016 and 2017. The line for this changes color in 2017 to mark a new method by which the Bank of China measured credit. Up through 2016, levels fluctuate between roughly 2 trillion yuan and 500 billion yuan. New yuan loan volume is also shown with another line, which reaches a record of about $3.2 trillion in January 2019.

In sum, the efficacy of the Chinese stimulus could be instrumental in deciding whose views prevail: the believers or the skeptics. And if the believers are right, emerging market equities – given their proximity to the stimulus and current valuations – could be well-positioned to benefit.

For more on our asset class views for 2019, read our Asset Allocation Outlook, Late Cycle vs. End Cycle Investing.


The Author

Geraldine Sundstrom

Portfolio Manager, Asset Allocation, EMEA

View Profile

Latest Insights


Understanding Investing
Recessions: What Investors Need to Know

Recessions: What Investors Need to Know

The old adage “what goes up, must come down” aptly describes a dynamic economy that has historically followed a cycle of growth and decline. The down period in that cycle constitutes a recession, which affects investment returns across various asset classes. For this reason, investors may benefit from understanding what a recession is, what causes it, and the steps to take as economic conditions change.


PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

PIMCO Europe GmbH - Spain
Paseo de la Castellana, 43
28046 Madrid, Spain
Tel: +34 810 809 912

1 According to our calculations and recessions defined by National Bureau of Economic Research going back to 1951 and drawdowns of at least 12%.

Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.