Commonwealth

China’s push for what is known as “common prosperity” has led to more of a crackdown on companies that don’t fit in with its longer-term goals. Harsh Chinese regulatory oversight is not new, yet recent changes in the country’s philosophy have led to more concerns about the future ramifications for Chinese companies listed on U.S. exchanges. Below, I’ll dive into the regulatory concerns and how they might affect any U.S.-based holders of U.S.-listed Chinese securities.

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In 2021, we have seen our fair share of requests from advisors and their clients to remove or reduce the exposure to China in their portfolios. This has happened for several reasons. In a previous post, I discussed both the strong foreign direct investment into China in 2020 and the stark contrast between the country and the rest of the world in 2020 nine months into the pandemic. Nearly a year later, we have seen the Chinese government take swift actions around foreign direct investment, including the planned delisting of Chinese ride-hailing company, Didi, from U.S. exchanges; fines on technology firms; and questions around the future of U.S. foreign direct investment.

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There were a number of important economic data releases last week, with a look at producer inflation, retail sales, home builder confidence, new home construction, industrial production, and the results from the most recent Fed meeting. This will be another busy week of updates, with reports scheduled on consumer confidence, housing sales, durable goods orders, and personal income and spending.

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The recent resurgence in COVID-19 cases and the emergence of the highly mutated Omicron variant are reminders that the pandemic is still very much a part of our lives. It is unclear how serious the health implications of the Omicron variant will be, let alone how governments, households, and firms will respond to it. While the financial markets have been through a range of emotions in the past few weeks, there is little evidence on how the underlying global economies will react.

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Throughout the pandemic, we’ve seen a large-scale exercise in risk assessment. Both governments and individuals have had to make a number of risk assessments, weighing the cost and benefits of different actions without definitive information. Investors are making investment decisions based on risk as well, as no one can be a perfect forecaster. So, to the extent we can, we must not only be conscious of the uncertainty of our investment returns but also of the risk that we will make poor choices when faced with different results, both good and bad.

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Here at Commonwealth, we’ve spent a lot of time breaking down earnings results and commentary in the past few months and after the third quarter ended. For the most part, business for corporate America is strong, and the post-pandemic rebound continues with a few disruptions related to the spread of new variants. But the most common theme we’ve heard discussed in the calls we’ve participated in relates to the supply chain and the negative impact it is having on earnings and how it could continue well into 2022. And it’s not just us. According to FactSet, 342 of the S&P 500 companies made some sort of reference to the supply chain in their quarterly earnings calls. That is at a 10-year high, and it highlights how much of an issue this has become in creating bottlenecks for the economy and corporate earnings. The supply chain is critical, as it can result in demand destruction as consumers choose not to wait around to make a purchase. It can also result in higher costs. Both of these factors put and likely will continue to put downward pressure on earnings in the near term.

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