China Stimulus
China’s labor market is polarized between high unemployment among university graduates and an acute shortage of blue-collar labor. The high jobless rate among young workers is structural and will not decline a lot even during an economic recovery. Given the structural scarcities of blue-collar workers, the authorities will be less inclined to resort to their old playbook of stimulating infrastructure, construction, and manufacturing.
There has been a paradigm shift in Beijing’s approach to policy stimulus. The main purpose of government policy is now managing downside risks to the economy in both the short and long term. The priority for the central government is to build an economic and financial system resilient against potential negative shocks, including external threats.
Rather than teetering into recession, global growth has firmed since the start of the year. While we still expect inflation to decline, the risk that central banks will need to lift rates more than discounted has increased. Long-term focused investors should start raising cash allocations by trimming their equity holdings.
Global demand for new energy vehicles (NEVs) remains in a long-term uptrend, propelled by falling battery prices, improved driving range and an upgraded charging infrastructure. That said, diminishing policy support in China and Europe will spark a drop in the growth rate of global NEV sales to about 35% this year, down from about 60% last year. Global NEV-related stocks are likely to rise on a structural basis, but we recommend that investors wait for a better entry point given that valuations remain high.
Great Power Rivalry is taking another leg up as Russia and China further align their geopolitical interests. Investors should stay long USD-CNY, favor defensives over cyclicals, and markets like North America and DM Europe that have less exposure to geopolitical risk.
Pent-up demand for consumer goods and services will boost Chinese household spending this year. Beyond the next 12 to 18 months, however, structural forces will likely drive Chinese household consumption growth lower than in the pre-pandemic era.
Investor sentiment on China and EM has become bullish. Meanwhile, the reflation plays have begun fraying on the edges. Cracks always appear first in the most sensitive reflation plays and then spread to the core. The narratives of the Fed's imminent pivot and China's recovery will be questioned in the coming months. Thus, China/EM assets and related plays will sell off, and the US dollar will rebound.
Copper prices are vulnerable to the downside in the coming months on a narrowing global supply-demand deficit. We expect that copper prices will plummet by 15-20% from the current level. However, the lingering structural supply deficit will put a floor under copper prices after this correction.
The US economy will experience a period of benign disinflation over the next few quarters. Beyond this goldilocks period, either the economy will slip into a mild recession in 2024, or more ominously, a second wave of inflation will prompt the Fed to slam on the brakes, leading to a deep recession.
The regulatory clampdown on Chinese platform companies is over. However, these companies have entered a new phase of active government control. Going forward, most platform companies’ strategic and business decisions will prioritize national interests, at the expense of shareholder interests. After the recent sharp outperformance, we suggest reducing the allocation to China's Investable Index from neutral to underweight within both global and EM equity portfolios.