Is the market worrying too much about growth?
Richard Buxton, Head of Strategy, UK Alpha, discusses the curious market mood, which seems to be fretting about growth momentum despite decent macro data, supportive central banks and upbeat company results.
To my mind, the macroeconomic data on a global basis (and certainly the US) does not justify negative real yields of over 1%, so I continue to think it is not the macro data that is driving bond markets … although heaven knows what is.
The market’s obsession with the peak in economic momentum is something we’ve seen before, but it is not the same thing as the peak of economic expansion. The spread of the Delta variant of Covid has created a two-steps-forward-one-step-back journey towards recovery, but central banks are going to remain incredibly supportive. The Fed is back to speaking with one voice again, softening markets up for a gentle tapering in Q4. On top of that, we still have continued fiscal expansion in the US, UK and even now in Europe, with a lot of money being spent on the energy transition.
My impressions from the results season are that, despite margins being squeezed in certain areas as costs pick up due to raw material prices and freight/logistics issues, company management generally sound positive and upbeat, they’re investing, and adjusting working practices for this ‘new normal’. To me, this supports investors having exposure to the reopening and recovery trades in the market.
I was particularly pleased by results from some UK banks, which last year took massive provisions against potential bad debts arising from the pandemic and very gloomy economic assumptions. In actuality, we have now seen modest write-backs and the remaining provision are still, in my view, in excess of what will prove necessary so further positive adjustments could come over the next couple of years. Admittedly loan growth is slow (excluding mortgages) at the moment, but I think investors can expect dividend growth or even share buybacks over the next couple of years.
My final thought is on the continued polarisation of valuations, with mid double-digit free cash flow yields on oil and mining stocks, with dividends yields of high single-digits. Clearly these sectors are not in vogue, given the climate situation, but it’s notable how the market doesn’t seem to know what the right yield should be.
China: volatility presents attractive opportunities
Vincent Che, Fund Manager, Ping An, discusses the causes of the recent volatility in Chinese equity markets, and why this can provide attractive investment opportunities for longer-term investors.
It’s been a rollercoaster ride for the Chinese equity market over the past few weeks. The latest regulatory crackdown from the Chinese government, which targeted private, after-school tutoring companies, was the main trigger of the recent volatility. The initial policy details seemed unreasonable to many, and the measures were far stricter than the market had expected, which led to further speculation about the government’s targeting of the private sector as a whole.
This move is part of its ongoing regulatory cycle, which we’ve seen target fintech, internet and e-commerce, and now education. The government is placing greater focus on ‘common prosperity’ – the welfare of households and equality, and more social responsibility by public and private enterprises, with the aim to ensure a sustainable, stable economic growth strategy for China. Given that the private sector is one of the most important areas of growth in China, we think it’s unlikely the government will want to introduce policies to harm it.
Furthermore, China has been through several regulatory cycles across various sectors, and these patterns can give us an idea of what to expect with its latest policy. Policy announcements in China are often worded strongly to signal an industry to conduct a self-review, but by the time they are finalised, they tend to be less stringent than the initial announcements, and more reasonable. In addition, regulators tend to be a bit behind the curve, especially in fast-growing sectors, so we think the latest move can be viewed as ‘catch-up’ regulation, rather than a crackdown on all private companies.
Elsewhere, the worsening Covid-19 situation is putting additional pressure on the Chinese equity market. The Delta variant has been spreading very quickly, and some cities have reintroduced lockdowns, with measures like cross-city travel bans being enforced. This has caused concerns about the pace of consumption recovery, and developments are worth monitoring closely.
More positively, last week many A-share companies pre-announced their first-half results, and around 40% of these companies reported earnings growth of more than 100%, which was roughly in line with our expectations. Most of the companies that have reported so far are in non-financial sectors, and the market will now switch its focus to consumer companies and growth sectors, in particular, to gauge how these names have been coping with recent regulatory pressure and their expectations for future earnings. In terms of flows, we have started to see inflows into the Hong Kong market over the past few days, following three weeks of strong outflows, which is encouraging.
To conclude, while market uncertainty is likely to persist in the short term, the downward pressure on valuations presents attractive opportunities for long-term investors. We believe it is unlikely that the Chinese government will want to derail the new economy given its importance to long-term economic development.
Merian Global Investors – now part of the Jupiter Group – entered into a strategic partnership with Ping An Asset Management (Hong Kong) in 2018.
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