ClockWise blog: Focus turns to China

Last week, China mainland shares recorded their best weekly performance since November 2008, with a 25% rally coming from the first stimulus announcement from the Chinese government on 24th September, as we head into the Golden Week celebrations (Chart 1).

Optimism around the economy has also spread to other assets linked to China demand, such as the European luxury goods sector and industrial metals – both benefitting from the narrative. We believe this narrative is positive for emerging market equities and Asia Pacific, and also European stocks – given the potential upside risk as investor appetite for these regions improves from low levels.

Chart 1: Assets linked to China demand have outperformed

Source: Bloomberg as at 30 September 2024. Total returns in local currency using China CSI 300 index for China Mainland, Hang Seng index for Hong Kong, Goldman Sachs EU Luxury Goods index for Europe Luxury Goods, BCOM Industrial Metals index for Industrial Metals and MSCI ACWI index for Global Stocks.

Chinese consumer confidence has been sitting at historically low levels for the past couple of years (Chart 2). The country is battling an ongoing property crisis, domestic demand has been soft and inflation very low. Last week, a wide variety of supportive measures were announced, including rate cuts, measures to support the housing and equity market and a commitment towards fiscal stimulus. This is a significant move away from the more piecemeal approach previously seen from China’s authorities.

A sea-change in approach from China’s authorities could turn the economy around and be significant globally. However, China’s problems are complex and fiscal stimulus would need to be large. The key will be whether domestic confidence returns, and the economy rebalances towards the consumer. Meanwhile, the jury is still out on the longer run economic impact, and a lot of good news is now priced in – so markets could end up disappointed.

Chart 2: Chinese consumer confidence at historical lows

Source: LSEG Datastream as at August 2024.

Another significant development last week came from Japan, where Shigeru Ishiba won the ruling Liberal Democratic Party (LDP)’s election to become the next Prime Minister. Given his perceived support for Bank of Japan tightening, that one of the other frontrunners was seen as potentially much more dovish, and the fact that his victory was unexpected by the market, the Japanese yen strengthened sharply and Topix futures dropped by 5% in the immediate aftermath. We hold no strong view on Japanese equities or the yen at present, but it will be interesting to see if this new leadership provides opportunities for investors.

This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.