What China's dip in exports tells us about the global economy

China reports that its exports fell by 7.5% in May from a year ago. Roundhill Investments Chief Strategy Officer David Mazza sits down with Yahoo Finance Live to discuss what China's import-export data could signal for global demand.

Video transcript

JULIE HYMAN: Well, data out of the world's second biggest economy has been a mixed bag lately. But today's export numbers paint a pretty clear picture. May's figure coming in way below expectations with a 7 and 1/2% year-over-year contraction. That's not a good sign for global growth.

Joining us now is David Mazza. He is Roundhill Investments Chief Strategy Officer. And Dave, we've really been seeing this China ripple effect day by day as we see different data points. Today, I think luxury companies in Europe, for example, are taking a hit. But we have seen it spread to the US as well. So when you're thinking about strategy, how are you incorporating the China narrative, not just what it's going to mean for China, but what it's going to mean also around the globe?

DAVID MAZZA: And I think you're hitting the nail on the head. That's actually what's most important when looking at particularly China exports data. And there's no other way to read it. To your point, it's no longer a mixed bag. This was weak numbers. In particular, the data actually would have been even weaker if it wasn't for their exports to Russia. And we all know what that's about.

If you actually read through exports to the US were down around 18%. Over 25% down to the EU. And that is, I think, really significant. Because now, we're seeing perhaps an area that we thought was going to carry us forward and be particularly coming out of COVID, they were later to do so than other areas around the globe that's now stumbling. And I think the bigger picture, particularly when we have all these headwinds out there economically, it does begin to make a lot less sense of how the equity market can continue to power through.

And right now, futures look like they're about to be positive again.

BRAD SMITH: Their own government has a GDP growth target, I believe, about 5% this year. So what does this mean in terms of tracking towards that, as some would say, conservative target?

DAVID MAZZA: That's certainly a lot different than the double digit growth that I think many became accustomed to. What's interesting, though, today is that we are hearing reports of state-owned banks beginning to cut rates to try to stimulate the economy. And I think this is the same as we've seen in other economies. The Chinese government is seemingly a bit between a rock and a hard place here is that you don't want to overstimulate.

But at this point, it seems like they're going to need to go down the direction particularly if Europe and US are slowing down.

JULIE HYMAN: We've talked to a lot of investors who are looking outside of the US for investment ideas. And I think you're more concentrate on the US, if I'm not mistaken. But how are you thinking about that global allocation and how it relates to how much people are going to be investing in the US?

DAVID MAZZA: Well, you're absolutely right. So there's really, I think, a few points here. One is heading into the year, it did seem like Europe and non-US actually exposures were significantly more attractive than they have been in years. We know particularly Europe, and to some extent the emerging markets, have been unbelievably attractive from a valuation standpoint. But as we know, markets can be cheap for a long time.

You recently were talking about Japan, which was a market that for many, many years, the cheapest on price to book, price to earnings, anything. But there was no catalyst. They have a bit of a catalyst now with some corporate reforms. But other markets, it's getting a bit more challenging. So the earnings growth were there, particularly, in Europe on the luxury side. Those companies were some of the leaders there.

Just like it's been tech leading in the US, it's been luxury leading in Europe. So investors began to flock there. I still think there's a big structural underweight to non-US stocks. We have led for so long the idea of diversification gets harder and harder. If you're continuing to rebalance into an area that underperforms, that gets tricky to do. With that being said, I think it is important, of course, over the long term to have broad-based global exposure. It's not just about the US.

I think if you're not having China power forward that part of the portfolio, which it had been really for many years, it does get difficult to continue to make those decisions.

BRAD SMITH: And we had already seen the IMF put forward their targets for global growth for this year with China and India really powering much of that. If we did continue to see weakness in some of the data coming out of China, how should investors be repositioning? Is there a trade that they should be keeping in the back of their heads as they think about some of the weaker data that's come out of China recently?

DAVID MAZZA: To me, it's interesting because all roads then lead back to the US. So it used to be an environment of TINA. Meaning, there is no alternative to stocks. Now, within equities, there becomes almost no alternative to the US.

And if we look at where valuations are, particularly, in some of the tech names, it gets hard. You have to hold your nose. And say, I'm buying a stock that trades at this much not even price to earnings, price to revenue of 30 times or 20 times, what have. You they're not necessarily inexpensive. But where is the earnings growth coming from? It does certainly continually seem to be the US.

So even though, again, things were lining up to be a bit better, if this economic data and weakness continues out of China, the interconnectedness, of course, with economies like Germany and France in Europe, it gets a bit more murky of exactly how you would think about where your allocations should be.

So I am not necessarily thinking that the opportunity in China is actually going to get much greater until we start to see some more clarity on data like the exports growth.

BRAD SMITH: Sounds good. Of course, it's a lot to continue to track going forward here. w