The debt ceiling issue of the US government may lead to higher volatility of asset prices. When the US government hits its debt ceiling, the overall performance of the market depends on the duration of the potential crisis and the level of potential default risks. We believe the Congress will ultimately come to an agreement in the next 2 months, after some hard bargaining and strong words from both the Democratic and Republican parties. To us, any weakness in share prices is a buying opportunity.
China seeks to fulfill its ambitions as a world-leading economic and technology superpower, and to transition from an export-led growth model to achieving more sustainable and high-quality growth. To do so, the government is aggressively addressing a mix of critical challenges related to excesses and weaknesses in various markets and sectors, an ageing workforce and tensions with the US. Its latest efforts to put in more regulations are not dissimilar to the US and European Union’s antitrust efforts on the big internet companies. The key difference is that under the China model, the measures meted out are performed clinically with least resistance from the corporates. We need to recognize the manner at which China has gone about its regulatory moves will create volatility in the markets. In general, investors value a steady operating environment underpinned by market-oriented policies.
In China, there is fear that the latest crackdown on the fintech, education, food delivery and property sectors could expand to other industries such as health care, as the government looks to tighten its grip on big companies and reduce the wealth gap.
The beginning of the regulatory clampdowns started with Ant Group, an Alibaba’s FinTech offshoot and then to DiDi Chuxing. We believe the intervention will reshape the tech industry in China. So far, the case against Alibaba took the Chinese authority only four months to complete, whereas it will take years for the US and EU regulators to tackle Facebook, Google and Amazon, which are ready to fight tooth and nail.
We do not think the Chinese government is out there to destroy the tech giants, as they are already part of the future growth of the country, where the latest innovations are already underway. A case in point to note in the 14th Five Year Plan, the Chinese government has outlined sectors it wants to prioritize, including semiconductors, 5G, renewables, infrastructure, new energy vehicles and artificial intelligence.
In the near term, the latest regulatory events in China may cause bouts of volatility and investors should brace for that. Sentiment is likely to remain subdued until investors gain higher conviction that the regulatory reforms are fixing short-term issues for long term benefits. In the medium to long term, we maintain a constructive view on Chinese equities and believe the current pull back and volatility may offer opportunities to accumulate companies that will benefit from long-term structural themes under the 14th Five-Year Plan.
The global economic outlook will be a key focus for us, as this is the bedrock of what investing in financial markets is about. Following on from our discussion on this topic in the last newsletter, the latest global economic releases increasingly confirm our view that we are entering a mid-cycle phase for several economies. At this stage of growth, it is understandable that talks of tapering of monetary policy keeps coming up. We continue to stick to our views that the tapering would happen in 2022 despite calls from some of the Federal Reserve members to begin the exercise this year. In China, we believe the current market volatility in the Chinese stocks is unlikely to impact China’s macro-economic outlook significantly. The Chinese government has also sufficient dry powder to shore up growth if needed. It has recently begun to inject liquidity by cutting the reserve requirements ratio for banks