China reopening doesn’t mean ‘things will return to normal,’ analyst says

State Street Global Advisors Head of Policy Research Elliot Hentov joins Yahoo Finance Live to discuss the outlook for a China reopening and what that means for global financial markets.

Video Transcript

RACHELLE AKUFFO: Well, investors cautiously optimistic over adjustments to China's zero-COVID policy, loosening restrictions as it hopes to restart a stalling economy. Well, here with insight into China and a wider global market outlook, Elliot Hentov, head of macro policy research at State Street Global Advisors. Good to have you on the show. So what are markets digesting? Because they didn't seem to be that pressed about China yesterday, where we saw the reopening. What's different today?

ELLIOT HENTOV: Yeah, I wouldn't overinterpret the market moves. I think the challenge here is we know now China is going to reopen. Our own expectation has been that it would be largely open by March or April of the coming year. At that time schedule now, markets are trying to play around to figure out, well, maybe it'll actually happen quite a bit sooner, maybe not, how smooth will it be? And so the markets are feeling around, basically trying to forecast what does that mean for commodity demand growth, what does that mean for consumer consumption returning to China, et cetera, et cetera.

AKIKO FUJITA: As you try to assess, though, the impact of a reopening, Elliott, how do you counter that with the potential of spikes in COVID cases? We've already seen a surge. We heard from Dr. Anthony Fauci yesterday, saying there's a real concern in China trying to ease things up at this very time when they are seeing a spike in cases.

ELLIOT HENTOV: I think we've all been through this before in many other jurisdictions. The reality is, even if the rules fell away, the prevalence of the virus would mean that you basically would have economic patterns similar to a lockdown when spikes happen. And that's going to characterize most of the winter.

So the reality is, most of China will basically try to avoid the virus for the coming weeks and months. That's not the-- I think nobody should imagine that things return to normal this December. That's not the case. So the question really is, when will this reopening process be somewhat complete? Is it February? Is it March? Is it a little bit later throughout the year?

RACHELLE AKUFFO: So in terms of who will be the first initial beneficiaries of China's gradual reopening, which sectors are you looking at?

ELLIOT HENTOV: Well, there's a few. Obviously, commodities are one big factor. And you can see it in energy prices right now, which are trying to find a footing, trying to forecast to what degree Chinese demand comes back. And when Chinese demand comes back, it's obviously going to be a stimulant for a large chunk of emerging markets, particularly in Southeast Asia. And as that kind of locomotive pulls ahead, you'll start to see export amounts for eurozone goods also pick up.

So that's where you can kind of feel the first initial dominoes to be, which would be, obviously, commodities, then certain industries that are located in Southeast Asia, and then, of course, luxury goods, automotive that come from Europe.

AKIKO FUJITA: Elliot, when you look at other geopolitical risks, obviously, the ongoing fight over in Russia and Ukraine. You've got Europe imposing their sanctions this week on Russian oil. I mean, are we looking at that largely as sort of priced into the market? I mean, how significant are the risks stemming from that? And what are the things you think investors could potentially be overlooking?

ELLIOT HENTOV: I would say a big surprise this year has been how well Russian oil production has held up in the face of Western sanctions. I think going into 2023, one of the big risks is that we suddenly get an underproduction, an underperformance in Russian output. And that would basically affect global supply, too. What's still not clear from the oil price cap and the embargo that Europe has imposed is to what degree that will change the calculus for Russia vis-a-vis its export plans.

Currently, the market is assuming that this will basically pass without disruption, and that it will pass without disruption because the price cap is basically above the price that Russia's actually getting right now in terms of oil anyhow. So they feel like the oil shouldn't-- it shouldn't affect the outcome. But that's where the risks lie, both in terms of, like, natural degradation in terms of Russian output, as well as some unintended consequences from some of the sanctions and policy actions.

AKIKO FUJITA: Elliot Hentov, State Street Global Advisors head of macro policy research, it was good to get your insight this morning. Appreciate you joining us.