China Stimulus
China's economic recovery will be led by consumer spending on services rather than the industrial sector. The current equity market leadership – outperformance by tech stocks – is unsustainable. Persistent deflationary forces will compel policymakers to inject more liquidity and bring down interest rates to reflate the economy. Hence, the RMB will resume its decline against the USD soon.
How to play the reopening? Which sectors will benefit the most? What will be the impact of the reopening on the rest of the world? Why is the PBoC facing the Impossible Trinity? Why has the PBoC tightened liquidity, prompting a rise in onshore interest rates? What are the implications for interest rates and the currency going forward? Is it time to upgrade Chinese onshore and offshore stocks?
Prefer government bonds over stocks, defensive sectors over cyclicals, and large caps over small caps. Favor North America over other markets. Favor emerging markets like Southeast Asia and Latin America over Greater China, Turkey, and emerging Europe. Stick with aerospace/defense stocks.
Prefer government bonds over stocks, defensive sectors over cyclicals, and large caps over small caps. Favor North America over other markets. Favor emerging markets like Southeast Asia and Latin America over Greater China, Turkey, and emerging Europe. Stick with aerospace/defense stocks.
In this <i>Strategy Outlook</i>, we present the major investment themes and views we see playing out next year and beyond.
For the first time in decades, the Fed is raising rates while the US Leading Economic Indicator has fallen into contractionary territory and the global manufacturing PMI’s new orders sub-index has dropped below 50. Hence, the outlook for global stocks is currently poor. However, the underperformance of EM equities versus the US is in a late stage. We are putting EM stocks on an upgrade watch list and recommend buying EM domestic bonds opportunistically.
China’s infrastructure investment growth rate will likely slow from its current nominal 14% to 4-6% in 2023H1, on a year-over-year basis. Funding constraints and a shrinking pool of good projects will cap the upside in China’s overall infrastructure fixed-asset investment (FAI) in the next six months.
Is China completely abandoning its dynamic zero-COVID policy? When will the economy start recovering? What are the implications for Chinese stocks and China-related assets?
Have authorities provided enough financing to property developers? Will developers be able to repay these loans and, if not, who would bear the cost of potential defaults?
What should be the strategy for Chinese onshore rates and the RMB?
The Chinese government will repress social unrest, then relax Covid-19 social restrictions to try to stabilize the economy. Russia will be aggressive in the short term but will pursue a ceasefire before March 2024. European and Italian risk will stay high on energy constraints.
China is on the verge of experiencing a full range of deflation. Poor domestic demand will likely continue into 1H 2023 amid the ailing housing market, subdued private-sector sentiment and the zero-Covid policy, warranting a cautious stance on Chinese equities.