Markets are grappling with a rising number of inflections as the year enters its final quarter. The Federal Reserve (the “Fed”) kickstarted its long-awaited easing cycle in September and now the debate centers on the pace and extent of rate cuts. Conflict in the Middle East is entering a new stage, heightening the risk of regional escalation and supply disruptions. China surprised investors by announcing a bolder stimulus package aimed at reviving its economy. All of this unfolds just days ahead of a critical election in the U.S., whose outcome could have far-reaching implications in areas ranging from global trade to geopolitics. October’s Global Strategy Meeting touched on several of these transitions, with an emphasis on developments in China.
China: policy pivot or head fake?
China had relied on incremental measures to try to support economic activity since its post-pandemic recovery fizzled out. This ineffective, timid approach – which contributed to pushing local shares to five-anda-half year lows by mid-September – inflected in late September when authorities announced a more forceful, multi-pronged stimulus package. The measures included monetary loosening, additional fiscal spending, easing in housing restrictions, and pledges to make the business environment more predictable. Participants agreed this was a welcomed move for its coordinated and broadbased nature, along with its endorsement by the Politburo, which signaled a greater sense of urgency. The measures also directly targeted the most challenged areas, including financially stretched local governments, the housing sector, and, to a lesser extent, low-income households.
Our Asia specialist took a step back by framing the recent measures in the context of China’s chief economic policy goal, namely maintaining financial stability. The focus on cleaning up the financial system - addressing shadow banking, developer leverage, local government vehicles - resulted in a hesitancy to deliver the large-scale stimulus efforts seen in the past. Without jeopardizing financial stability, however, policymakers could take steps to try to tap into China’s strengths such as ample household savings - currently hovering near 100% of GDP - that could fuel higher home sales. To achieve this, policymakers should first address the inventory overhang and concerns over developers’ viability, while taking steps to lessen concerns about employment prospects (see Figure 1). Furthermore, he stressed that for any stimulus to succeed in delivering more than just a temporary boost to activity, it is critical for expectations among households and corporates to improve in a way that encourages them to resume spending and investing – something that will take time to determine (TRG Macro Mosaic - What’s next for China’s growth pivot - October 2024).
China and EM: market implications
Following the exchange about the details of China’s policy announcements, the discussion shifted to its implications for both domestic and broader emerging market (“EM”) assets. On the former, local shares predictably surged on the surprising news. Besides the stronger pro-growth signal by policymakers, participants noted that the market gains also benefited from historically low positioning and the fact that some measures were directly aimed at propping stocks up (e.g., a liquidity scheme for share repurchases). More recently, however, the stock market gave some of its gains back as investors began to question the full extent of the commitment to the progrowth strategy. Specifically, speakers noted the lack of a clear, sizeable pro-consumer measures – which are probably necessary to lift the economy out of deflation – as something preventing investors from adding more China exposure.
One portfolio manager noted that while the new efforts to stabilize housing and local governments are positive developments, the investment case for China remains uncertain. A key challenge stems from shifting policy priorities, with the economy taking a back seat to the pursuits of self-sufficiency and social stability. The largely technocratic, collective decision-making process of the past also shifted to a more unpredictable, centralized one. The experience of recent years illustrates that investors in China have been repeatedly blindsided, which partly justifies the market’s derating. One analyst also noted that it seems odd to focus on whether China slightly undershoots or meets its 5% growth target, considering that historically, rapid economic growth has not translated into superior earnings growth for Chinese companies (see Figure 2). This may point to deeper challenges including shortcomings with corporate governance and regulatory overreach.
For EM, portfolio managers thought that the China news was positive mostly from a sentiment standpoint – and that should remain the case until there is more information about the size, timeline, and specifics of the full stimulus package. For now, the link from China to EM optimism is based on the notion that policymakers showed their hand by signaling renewed urgency to put a floor on growth – and that removes a persistent source of market uncertainty.
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