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Weekly Market Update

Please see below “Investment implications of recent Chinese policy interventions” received from JP Morgan this morning, which provides details relating to recent changes made by Chinese regulators.

Having outperformed other regional stock markets for much of the pandemic, Chinese stocks have fallen sharply over the past few months (Exhibit 1). Concerns around the Chinese economy slowing were blamed for the initial move, but more recent declines have been triggered by regulatory tightening focused in specific sectors. This piece sets out why we remain positive on the medium-term outlook for Chinese assets, although we recognise that it may take some time for the scope of regulatory tightening to become clearer before sentiment towards the stock market improves.

Exhibit 1: Chinese and developed market equity returns

Source: MDCI, Refinitiv Datastream, J.P. Morgan Asset Management. Past Performance is not reliable indicator of current and future results. Data as of 16 August 2021. 

How should investors interpret the latest regulatory changes? 

Recent moves from policymakers are best understood in the context of Beijing’s efforts to balance short-term growth against longer-run policy objectives. 

In the technology sector, Chinese regulators are taking steps to address inappropriate use of market power, limit regulatory arbitrage opportunities and increase market competition. Cybersecurity is another emerging focus, with companies’ treatment of user data receiving particular attention. There are clear parallels to regulatory actions witnessed in developed markets in recent years. Companies that have chosen to pursue overseas listings – often Chinese technology names trading on US exchanges – are also coming under additional scrutiny and may be particularly vulnerable to future rulings. While broadly we are seeing technology regulators take a more active stance, we do not believe it is in China’s strategic interests to punish its domestic champions, particularly in the context of the longstanding US-China rivalry. Instead we think regulators want to ensure that technology giants are competing with the next cohort of innovators in a fair and well-functioning market.

The education sector has also seen significant regulatory changes. The Chinese government will no longer approve the setup of new private tutoring companies, and existing companies which tutor the school curriculum will be required to transform into non-profit institutions. While private sector tuition remains discretionary in most western countries, after-school tutoring has become so pervasive in China that authorities now view it as a key social policy challenge. The latest measures are designed to alleviate both the mental burden of extra tuition on students and the financial burden for parents, with a view to stemming the decline in China’s birth rate over time. In this context, we do not expect that the severe actions taken in the education sector will become widespread across the private sector. 

The tone of recent policy interventions has highlighted that Beijing is keen to ensure that corporate behaviour remains aligned with the administration’s long-term policy goals. That said, we do not believe this represents a fundamental shift in another key long-term objective: to open up Chinese markets to foreign capital. Substantial efforts to integrate both Chinese equities and bonds into international indices are ongoing. In our view, policymakers will be acutely aware that they do not want regulatory actions to undermine the attractiveness of Chinese assets to the global investment community. 

What do we expect next? 

The Politburo meeting at the start of August provided greater insight into the economic and regulatory policy direction for the rest of the year. 

Further reforms are still on the cards for some of the ‘new economy’ sectors where the Chinese authorities wish to achieve better social outcomes or improve the competitive environment. Regulatory uncertainty will remain elevated until the scope of reforms becomes clearer, particularly for politically or socially sensitive industries. It is important to recognise, however, that many of China’s new economy leaders will still have room to chart future growth; they have been working closely with the government for many years and will continue to do so. 

There will also be sectors that benefit from future policy changes. Examples include climate-focused technology to support greenhouse gas reductions, industries related to accelerating the rollout of electric vehicles, and sectors critical to achieving self-sufficiency within key parts of the technology supply chain. 

From an economic perspective, the Chinese government recognises the imbalances in the economic recovery, with small and medium-sized enterprises and low-income households having lagged to date. As a result, targeted fiscal stimulus is likely to be preferred to monetary policy in supporting growth for the rest of the year. Monetary policy has shifted to a more neutral stance following modest tightening in the first half of the year, although further easing is possible if growth momentum continues to fade. Broadly, Beijing appears to be fine-tuning growth back on to a more stable path, having gone through the “boom phase” of its recovery last year.

The impact of the spread of the Delta variant remains something of a wildcard. The Chinese government was highly effective at stemming the spread of previous variants, but cases have been on the rise again. Vaccine rollout is proceeding at pace, although real-world studies of the efficacy of different vaccines remain limited. This will be an issue to watch closely over the coming months. We don’t expect a repeat of the sharp slowdown witnessed in the Chinese economy last year, but given China’s desire to pursue a “zero-Covid” strategy, there is a risk that restrictions will be applied periodically. This could well have knock-on impacts in the global supply chain; recent shutdowns linked to Covid-19 in Ningbo-Zhoushan – the world’s third busiest port – are a prime example.

What are the investment implications?  The sharp declines over the past few months have served as a reminder that Chinese equities do come with a higher level of volatility than many other markets. Over the past 25 years, the annualised return from the Chinese stock market is over 5% in local currency terms, despite average intra-year declines of close to 30%. Calling the bottom of any market correction is an impossible task, although valuations have now fallen substantially, from over 18x 12-month forward earnings at the peak earlier in the year to below 14x today for MSCI China. While valuations may remain under pressure until the markings of the regulatory playing field become clearer, ultimately, we expect investor attention to gradually return to company-specific fundamentals. 

In our view, Chinese assets remain an essential part of both global equity and global bond allocations. Beijing has made a huge push to open its capital markets to international investors, and we expect this to remain a priority. Short-term volatility has not fundamentally changed the long-term investment opportunity in China, which is based on technological innovation and the rise of the domestic consumer. The key for investors is to access the Chinese markets in the right way: via a diversified portfolio of both onshore and offshore companies and with an active approach that can differentiate between the winners and losers of the government’s long-term policy goals. 

Please check in with us soon for further relevant content and market news.

David

23rd August 2021

 

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Brewin Dolphin Update: Markets in a Minute

Brewin Dolphin Update: Markets in a Minute

Brewin Dolphin emailed a market update on Tuesday evening (28/04/2020) as below:

 

As a Discretionary Fund Manager Brewin Dolphin offer a range of Managed Portfolio Services in the UK.  In keeping with our blogs over the last 6 weeks or so we seek to provide a wide range of input so that you can understand a variety of commentary and see consensus views.

Steve Speed

29/04/2020

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Why markets have rebounded and what could happen next

Interesting input from Russ Mould of A J Bell written on Thursday and received on Saturday lunch time (25/04/2020). I am conscious of the dates of articles as some of what we receive is out of date by the time we receive it!

Why markets have rebounded and what could happen next

Short-term viral implications for investors to ponder

At the time of writing, Italy’s MIB-30 index is up by 15% from its 12 March low, a trend from which this column, looking at it solely from the narrow perspective of investments, can draw some modicum of encouragement.

It is impossible to be dispassionate about, or comfortable with, such matters, but the Milan market benchmark’s steady recovery reflects a peak in the number of new daily cases across Italy on 21 March at 6,155 and in the number of fatalities at 919 six days later.

At the time of writing the last reading for those numbers are 3,047 and 433 respectively and it is to be hoped that the trend remains down, for humanitarian reasons above all others.

As suggested here three weeks ago, this shows that equity markets are responding to changes in the curve of the coronavirus outbreak.

A slowdown in the number of cases was always going to be seen as good news, given how investors would interpret this as a sign that things were getting less bad, and that as a result the outbreak would eventually stop getting worse and once it stopped getting worse it would eventually start getting better.

This is where markets are now. The number of new cases is growing much more slowly, even if the aggregate number of those unlucky enough to catch the dreadful virus is still growing overall. This has been enough for equity markets to start pricing in what might happen if, as and when the government-imposed lockdowns are brought to an end and economic activity resumes.

As a result, several benchmarks are looking even sprightlier than that of Italy. The UK’s FTSE 100 is up 16% from its 23 March nadir of 4,994, while Germany’s DAX and America’s S&P 500 are back in bull-market territory, with gains of more than 20%.

The question now is whether these gains can be maintained or extended and in the short term a lot of that will depend upon the shape of the upturn. The latest Bank of America institutional investor sentiment survey suggests that U-shaped is the current favourite, over W, V, L, ‘bathtub’ or tick-shaped (or any other options that you could think of).

ALPHABET SOUP

What is interesting to note is how a V-shaped recovery is only third choice, according to that Bank of America monthly survey. This suggests some degree of circumspection among the professional investment community and it is easy to see why, as Spain, New Zealand and the UK, to name but three, extend their lockdowns and other nations such as Italy ease them at a very steady pace.
When it comes to judging what sort of recovery might ensue, investors can ask themselves the following questions:
1 When will I first want to use public transport?
2 When will I first want to eat in a restaurant or drink in a bar or pub?
3 When will I first want to board an aeroplane or cruise ship?
4 When will I first want to attend a public event at a cinema, theatre or sports stadium?

The answers could be informative. In addition, you can then imagine that you have been furloughed or even lost your job and see if the answers change at all. The assumption that all of those unlucky enough to find themselves in that position walk straight back into full-time employment could be an optimistic one as unfortunately some firms are going to fail, no matter how much support they receive from the government, management, staff and customers alike.

These questions are very difficult, if not impossible, to answer. As such, investing money on the back of them could prove a fraught exercise, even if markets do seem to have one very powerful ally in the form of central banks, notably the US Federal Reserve. The value of the assets held on the American central bank’s balance sheet has swollen by $2.2tn, or 53%, since the end of February.

That tidal wave of liquidity looks to be carrying US stocks higher. Students of history will however remember that the first round of quantitative easing that began in autumn 2008 had a similar initial effect, only for the S&P 500 to buckle in face of weak macroeconomic data and corporate earnings reports and only bottom five months later.

This column will revisit the issue of central bank intervention in an analysis of long-term potential implications of the coronavirus outbreak for financial markets next week. Before then there is one further short-term indicator of note: whether the FTSE 100 can reach (which it did very briefly on 20 April, only to fall back) and stay above 5,816, the high reached after the three-day rally that followed the low on 23 March.

If so, that could break the traditional ‘bear’ market pattern of a series of lower highs and lower lows and give investors real grounds for hope, at least from a portfolio point of view.

A J Bell offer products in the pension SIPP, SSAS and investment areas. They have a Stockbroker within their business too. Russ Mould is quite often heard commenting on Radio 4.
Steve Speed
27/04/2020