China’s Golden Week and a look back on Q3

China’s Golden
Week and a look back on Q3

China has been the laggard in global stock markets over the last few years but following the announcement of a raft of stimulus measures over the last week, Chinese equities have staged a dramatic resurgence and are now the best performing equity market this year.

Economic momentum has been slowing in China and the all-important property sector remains trapped in a downward spiral that started in 2021. Deflationary pressures have been intensifying with producer prices falling, and core consumer price inflation is at a 3.5 year low. It was looking increasingly like the economy would fail to meet its 5% GDP growth target. The Chinese stock-market has been unloved with many investors declaring it un-investable despite cheap valuations.

In response to this gloomy backdrop, Chinese authorities have unleashed a swathe of stimulus measures, which has ignited a breath-taking rally in equity markets in both mainland China and Hong Kong. While there is scepticism over the likely long-term efficacy of the stimulus on the economy, it has certainly changed sentiment in a week. Pre-announcement, China was unloved and under-owned by investors, but many have now changed their minds. From un-investable to FOMO in just a week.

 

A Golden week for China’s stock markets

 
chart

Source: Artorius, Bloomberg

Hang-Seng China Enterprises is an index of Chinese shares listed in Hong Kong.

Shanghai-Shenzen CSI 300 is an index of mainland Chinese shares.

The CSI 300 has not traded since 30-September as all mainland Chinese markets are closed from 1-October to 7-October for the “Golden week” celebrations that mark the 75th anniversary of the founding of the People’s Republic.

 

The stimulus measures announced so far include interest rate cuts from the People’s Bank of China (PBoC), significant support for the real estate sector, unprecedented direct support for the stock market through the provision of funds for institutional investors to purchase stocks and for companies to conduct share buybacks. Also, President Xi and the Politburo vowed to step up "necessary fiscal spending" to meet the country's economic growth target and we expect further announcements in the coming weeks. There is a clear sense that they will do “whatever it takes” in an echo of Mario Draghi statement back in 2012.

 

Third Quarter Review

After a strong first half of the year for global equity markets, the third quarter was a lot more volatile and returns more muted.

Overall Global Equities rose 5% in Q3 but for Sterling investors that was reduced to just 0.7% as the currency impact of weakness in the US Dollar and strength in Sterling hit returns (see below). There was also a significant change in market leadership during the quarter. As discussed above, China rallied strongly in the final week of the quarter and is now the best performing major market year-to-date. On the back of Chinese strength, emerging markets outperformed developed markets, and the US was a laggard. Within the US, the leadership of the major technology companies came to end as inflated expectations finally caught up and the rest of the market narrowed the performance gap. At a sector level, it was Utilities not Technology that led the way, benefitting from falling bond yields.

All change in Q3 with China leading the way following its “Golden Week” while the “Magnificent 7” leadership takes a pause

Performance of selected global equity indices in GBP (%)

 
chart

Source: Artorius, Bloomberg

Indices used are: Global – MSCI All-Country World, UK – MSCI UK, US – S&P 500, Magnificent 7 – Bloomberg Magnificent 7, S&P ex Magnificent 7, Europe ex UK – MSCI Europe ex UK, Japan – MSCI Japan, Emerging Markets – MSCI Emerging Markets, China – MSCI China

 

In Fixed Income, the wait for co-ordinated interest rate cuts finally came to an end with the US and UK joining other major central banks in starting to cut rates. The US Federal Reserve cut by a bigger than expected 50 basis points as falling inflation and signs of weakness in employment markets gave them scope to start easing, with the expectation of significant cutting to follow. This led to a rally in bonds over the quarter with global bonds rising 7%. Riskier bonds, such as high-yield debt, continue to perform well with credit spreads remaining very tight.

Performance, while still positive, was more muted for UK bonds as stickier inflation means less scope for interest rate cuts than in other regions. This has led to UK bond yields staying higher and are now above those in the US. This has had a major impact on currencies, which are in the short term mainly driven by interest rate differentials, and has seen Sterling perform strongly over the quarter, particularly versus the US dollar.

US Dollar weakness has been a theme with the currency sagging as markets moved to price in aggressive interest rate cuts from the Federal Reserve. Correspondingly other currencies have strengthened, although none as starkly as the Japanese Yen as the “carry-trade” unravels. Investors were able to take advantage of very low interest rates in Japan to borrow and invest elsewhere, which had forced the Yen to record lows. However, as interest rates rise in Japan in response to inflation and interest rates falling elsewhere, the gap in interest rates narrows and the attraction of the “carry-trade” diminishes. As this unwinds, we have seen strength in the Yen (up 12% versus the US dollar in the quarter) but also significant volatility, which has had a knock-on impact on other asset classes, most notably at the start of August where we saw a degree of market turmoil.

Bonds rallied strongly on the back of central bank interest rate cuts, UK bonds lagged global bonds as less rate cuts are expected than elsewhere (notably the US)

 
chart

Source: Artorius, Bloomberg

Indices used are: GBP Cash – Barclays Benchmark Overnight GBP Cash Index, UK Gilts – Bloomberg UK Government All Bonds, GBP Corporates – IBOXX Sterling Non-Gilts, Global Bonds – Bloomberg Global Aggregate Hedged GBP, Global High Yield – Bloomberg Global High Yield Hedged GBP, Emerging Markets Debt – Bloomberg EM Hard Currency Aggregate Hedged GBP

 

The US Dollar weakened significantly against other major currencies in Q3 as markets priced aggressive interest rate cuts from the Federal Reserve.

 
chart

Source: Artorius, Bloomberg

British Pound, Euro and Yen are shown as performance versus the US Dollar.

The Dollar Index compares the US Dollar to a basket of currencies.

 

Overall the 3rd quarter was positive for returns with both bonds and equities contributing positively to performance. Looking forward, markets should be supported by falling interest rates but there are notable geopolitical risks on the horizon, with the threat of escalation in the Middle East, as Israel expands its military operations, and uncertainty around the US Presidential election.

Gareth Thomas
Head of Investment Management

 
 

*Any feedback provided can be anonymous

 

Important Information

All expressions of opinion reflect the judgment of Artorius at 4th October 2024 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions.

Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.

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