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Crouching Tiger, Hidden Dragon

By Marius-Cristian Frunza
Weekly Briefs

One year ago, the whole world looked with pity at the Wuhan health crisis generated by a new coronavirus form. At that time, Wuhan seemed far away from Europe and the US and the likelihood the virus would spread outside China was low. Nobody knew that the invisible enemy had already passed the gates. The pandemic outbreak reshaped the global economy and is currently reshuffling the geopolitical hierarchy. What is the long-term impact and how is relevant for retail investors?

Before January 2020, China was in Western investors’ eyes nothing more than a glorified factory of cheap products, leveraging foreign innovation (without holding the patents). Fast forward, China is claiming its place of a global superpower. If no solution comes to curb the pandemic’s negative impact in Western economies, the Hidden Dragon from the East will reveal its true colours. China is on the right track to become in the next twelve months not only the world’s biggest economy but also the world’s largest creditor.  There are a few arguments to back this statement.

One year after Wuhan’s apocalyptic images, life in China is back to normal with no pandemic signs. The economy recovered quickly, and Beijing reported two consecutive quarters with decent growth.

The Chinese Yuan gained momentum since May 2020 compared to the US dollar, and this tendency will continue in the foreseeable future. There are chances that the Yuan will become a reserve currency, and this could be a massive game-changer in the financial world. China is already one of the largest buyers of US bonds. Therefore the Yuan becoming a leading currency could bring the US dollar’s hegemonic position to an end.

Bitcoin is a hot asset, and its price skyrocketed since Biden’s election. One should not forget that China controls the Bitcoin mining process overwhelmingly. If Bitcoin would have a “central bank”, its headquarters would be somewhere near Nanjing.

Western countries are carrying huge amounts of debt, and their economies are contracting. If the situation does not come back to normal, the only bailout could come only from the Chinese government. At that time we will witness, Chinese entrepreneurs will start opening factories in Europe and in the US and delocalised their industry in the West, where crouching citizens will provide labour to pay the debt contracted by their governments.

Getting exposure to the Chinese market should be a must for all investors still getting a kick out of buying Tesla in June 2020.

The supreme art of war is to subdue the enemy without fighting. Sun Tzu, The art of war

Market overview

The leading stock indices were in positive territory for the past two weeks, and the market is at an all-time high. Bitcoin is going through a new bubble, climbing above 41,000 USD. Gold is the only asset that remained directionless, not showing a clear foreseeable trend.

The oil price gained momentum, and the Brent crude oil recovered the losses inflicted by the pandemic outbreak and reached a similar level as 12 months ago.

The volatility index (VIX) is at its lowest point since March 2020, and it could dip further and touch a level similar to its pre-pandemic value. With no signs which could trigger inventors’ nervosity, following the current trend seems the best option.

Cryptocurrencies:

Ripple

While Bitcoin’s price goes through the roof, Ripple has grimmer perspectives despite a recent minor rally. The Federal government charged Ripple for conducting unregistered securities transactions. Ripple was fighting the case and tried earlier this week to settle with the U.S. Securities and Exchange Commission. This matter is a severe threat for Ripple’s growth and explains partially why it is lagging its peers in terms of market valuation.

But this is not the only reason why Ripple’s price is in hiatus. Many analysts pointed out that there are too many coins that do not add any value. Besides Bitcoin and Ethereum, there are only a hand of coins that have a legitimate place in the world of cryptocurrencies. The recent explosion in Bitcoin’s price may bring the right circumstances for a massive cleanout among cryptos.

Focus:

Tesla

Tesla’s share is reaching new limits, and it would not be a surprise to see its price above 1000 USD before the end of February. We all know by now that Musk is a genius, but interestingly enough, Tesla, the world’s biggest car manufacturer in terms of capitalisation produced in 2020 not less than 500,000 vehicles.  For comparison, Automobile Dacia SA, the Romanian leading car manufacturer, sold in 2019 over 750,000 cars. In just a few months, one could buy a second hand Dacia-Logan for the price of one Tesla share.

Does this make sense? The question is irrelevant, as many things are irrational in the stock market since March 2020. Nevertheless, let’s not forget that Tesla is a producer of physical goods, and at one point, its market value should be coherent with its book value.

Focus:

JP Morgan

Shares of JP Morgan rose since the beginning of the year by over 5%. Banks are surfing a positive trend amid hopes that a consistent stimulus will be passed when Biden will step into the White House. The institution led by Jamie Dimon is not presenting results above the expectations, but 2021 started well for banks. The created momentum delivers a strong signal that the financial industry is counting on the democrats to provide extensive and long-term support to the US economy. Therefore, we expect American banks to outperform their European and British peers.

Market outlook

There is bullish sentiment in the market across most asset classes. The Gold ounce is currently undervalued, and there are serious reasons to see a positive trend in the next quarter.

Bitcoin’s price will continue its path towards 50,000 USD, but some bumps could occur amid technical sales.  

The crude Brent price will keep its gains, and we expect to reach 60 USD in March when the global traffic could find its way towards new normality.

General Disclaimer

The information and data published in this research were prepared by the market research department of Darqube Ltd. Publications and reports of our research department are provided for information purposes only. Market data and figures are indicative and Darqube Ltd does not trade any financial instrument or offer investment recommendations and decision of any type. The information and analysis contained in this report has been prepared from sources that our research department believes to be objective, transparent and robust.

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