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Duncan Robertson

Market Outlook

Asia Outlook

Outlook
14 October 2024

By

Portfolio Manager, TT Asia and TT Global-Smid Cap Strategies

Latest Asian economic and market outlook. 

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The most significant events in markets over recent weeks have been policy easing in the US and China. The Fed decided to cut by 50bps, which we believe was the correct call, with 3-month rolling underlying inflation already below the central bank’s 2% target and rates clearly restrictive at these levels. This decision reinforces our view that there will be a soft landing in the world’s largest economy, and we take additional comfort from the fact that the Fed has substantial scope to cut much further. As we have argued previously, these rate cuts should be effective because consumer balance sheets are in reasonably good health across the developed world.

While the Fed’s decision was well-telegraphed, policy easing in China caught investors by surprise and catalysed a major relief rally. Key announcements include: cutting the Reserve Requirement Ratio to inject RMB 1 trillion of liquidity into the system; lowering outstanding mortgage rates to ease the mortgage burden for c.150m people; reducing downpayments for second homes; setting up a new swap facility to allow asset managers and insurers to tap at least RMB 500 billion of PBOC liquidity to purchase equities; and providing a further RMB 300 billion of funds to allow banks to lend to corporates for share buybacks. At the time of writing, there is speculation that these measures will be followed up with a series of fiscal announcements, including cash handouts for the poor, and issuing RMB 2 trillion via special bonds to stimulate consumption and help local governments tackle debt problems.

Some of the measures are healthy. For example, the moves to get banks to pass on lower rates to mortgage holders should boost consumption. Moves by Tier 1 cities to remove home purchase restrictions are also positive, although they will not help to address the more important issue of oversupply in these cities. It will be interesting to see what further measures are announced to support the market as the Politburo statement did call for an imminent reversal in declining property sales and prices. Interestingly however, it also called for a cap on new housing starts. This may be sensible in terms of limiting the risk of the property bubble inflating again, but it does suggest that the overarching policy goal will be to reduce downside risks associated with the property sector as opposed to returning to a property-led growth model.

The plan to inject capital into the six largest banks is puzzling and seemingly unnecessary. CCB, for example, has a 14% tier 1 capital ratio. Capital is not a constraint, unless the Non-Performing Loan problem is substantially worse than the official data suggests. The reason that banks are struggling to lend is that credit demand is low, and it is difficult to identify a new growth driver that will change this. Indeed, the former growth drivers of property, infrastructure and exports continue to look challenged, either due to oversupply or geopolitics. Consequently, we suspect that the capital injection will have little impact.

Following the rally, it is hard to argue that China overall is cheap and oversold. MSCI China is very close to its 5- and 10-year median P/E valuations. This comes against a backdrop where the fundamentals are arguably worse than at almost any time in the past 10 years, other than during the prolonged covid lockdown period. Our core view is that China remains challenged due to a combination of geopolitics, demographics, excess debt, deflation, and an unwind of the property bubble. Perhaps the best template for what is likely to happen in China is Japan. As Japan deflated, the market went through a multi-year period of underperformance, punctuated by the occasional sharp rally on hopes of a bottom. In our view, this is what we are witnessing in China now.

We are therefore moderately underweight, with a material underweight to China partially offset by an overweight to Hong Kong, albeit largely in international businesses. We have added slightly to some Hong Kong/China positions in recent days, including Prudential, Johnson Electric, Mindray Medical and Proya. However, we have also used the rally to trim positions such as Alibaba due to concerns that China’s ecommerce market is increasingly mature and competitive.

Given our underweight, the measures that concern us most from a portfolio risk management perspective are those targeted at the market, including the credit lines that are designed to help companies fund buybacks. These may be largely symbolic, but they are effectively telling corporates to buy the market, and by extension, telling citizens to do the same. We have seen in the past that China can experience sharp retail investor-fuelled rallies and that valuations can move well ahead of fundamentals. While this is clearly a risk to being underweight, it is one that we are comfortable with, as banking on Chinese retail investors buying the market is far from a compelling investment case when weighed up against the aforementioned structural issues and the exciting opportunities we see in other markets. 

Important Information:

Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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