Medium-term, resilient economic and earnings growth and excess liquidity are likely to remain the dominant market drivers. Nevertheless, the strongest economic momentum is peaking, which leads to more challenging terrain. With the positive earnings season catalysts now behind us, it might mean some of the macro headwinds we have just mentioned, could be spilling over into equities.
The current issue for the financial markets is how fast Central Bankers are going to pull back their bond market support. That will also set the timetable on how soon they will raise interest rates. Looking back, the Federal Reserve tapering which was announced in December 2013 and began the following month, lasted less than one year. It went on to raise interest rates one year later after tapering.
We believe the developed economies of the world would continue to be more tentative and leaning on a looser focus in tapering their balance sheets. In the Jackson Hole Symposium, Federal Reserve Chairman Jerome Powell announced that tapering could probably happen before year-end but mentioned that it would not be in a hurry to raise interest rates after that. Markets took this as a signal that the Federal Reserve would continue to support the economy with low-interest rates.
In Asia, China set expectations that further monetary policy easing steps are in the works after the People’s Bank of China (PBOC) reduced the banks’ reserve requirements ratio recently. Additionally, PBOC will be providing RMB300 billion of low-cost funds to banks for the purpose of lending to small and medium size companies. We see more scope for some fiscal support given general government revenue well ahead of expenditure, and that infrastructure projects will enter the implementation stage at a faster pace at the end of this year and early next year. Furthermore, Vice-Premier Liu He said the government would continue to support private businesses despite a regulatory crackdown across the technology and education sectors.
As an extension to our discussion in our previous month’s newsletter on the regulatory tightening in China, it was announced that the government will emphasize the strengthening of anti-monopoly measures and deepening the implementation of fair competition policy. This shall be the medium-term objective for deepening overall reform. The next phase of the country’s economic development is about promoting high-quality development and promoting common prosperity.
In the long term, we believe the Chinese market continues to promise growth amid the potential for higher domestic consumption and continued gains in investment. In the short term, we are at least seeing the government being proactive in shoring up the country’s economy with tweaks to counter the headwinds.
An issue worth talking about is China Evergrande Group. It is one of the largest property developers in China. Presently it is in the unenviable spotlight of experiencing a liquidity crunch after regulators curbed their funding access to control property prices and sector leverage. It is struggling under massive debt loads built during the boom years in the property market. This has a negative effect on the financial markets and economic contagion from a default event of this scale. We are relying on the policymakers to get it right, and in our opinion, their track record has been extremely good as shown in how they have gone about handling the Asian Financial Crisis, which gives us a lot of confidence. To begin with, the government’s fiscal position is also strong. We will be monitoring this event closely in the medium term.
We are probably in the mid-cycle of economic growth globally. There are current and new topical issues we are encountering each day. In our view, this is a natural course we should expect if history were to be of any guide. So far, the financial markets have already discounted a lot of these issues with some of the major Asian companies’ share prices declining sharply in the process. This is a market repricing process mechanism and it presents us an opportunity to scour for good ideas at more reasonable valuations.