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Matt Clark

Market Outlook

ACWI ex-US Outlook

Outlook
14 October 2024

By

Portfolio Manager, TT ACWI ex-US Strategy; Co-Portfolio Manager, TT Global Smid-Cap Strategy

Latest ACWI ex-US 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. We have a number of stocks that should benefit from Fed rate cuts, including Consumer Discretionary names such as JD Sports and Accor Hotels, as well as credit bureau Experian, and companies that are well positioned for a bottoming in the industrial cycle, including Ashtead and Infineon.   

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.

From a thematic perspective, some of our positions have come under pressure in recent weeks. For example, India was generally used as a funding source as investors shifted into China. Meanwhile, our memory exposure cost the fund as investors took some profits after a prolonged period of strong gains. We have maintained exposure to these themes. In our view, the Indian economy is benefiting from a simultaneous uptick in the banking, investment and property cycles, while memory prices should continue to be strong due to demand from AI servers, amongst other applications. High bandwidth memory is particularly sought after, but is complex and requires more capacity to produce. With evermore capacity shifting from conventional DRAM to high bandwidth memory, supply of conventional memory will likely remain tight, supporting prices.

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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