It has been a while since the US Dow Jones Industrial Average have fallen for such a prolonged period, notching its eighth straight weekly loss. The decline was on growing fears about the health of the global economy, especially those in the US and Europe, after years of money printing. We have to stretch all the way back to 1932 to find that sort of consecutive weekly losses. That period coincided with the Great Depression period.
In our opinion, the decline in the US stock market is based on fears of a recession from the hawkish stance taken by the US Federal Reserve on the high inflationary readings so far. We do not think that it would amount to a deep recession like the 1930s. During the 1930s, we had a banking system that was breaking down which went on to cause a sharp economic contraction. This time around, US regulators have been very stringent in preventing excesses by taking commercial banks under their wing and imposing stricter capital and liquidity requirements. However, we believe there is a possibility of a recession in the US given that the tighter monetary policy will have the effect of some form of demand destruction. Furthermore, prices of energy and food commodities such as wheat, palm oil, and dairy remain elevated, due in part to supply disruptions from the Russia-Ukraine war; this is pressuring central banks globally to stay focused on inflation even as growth slows.
The European banking system has so far been manageable with non-performing loans having fallen further. However, deterioration in asset quality related to the withdrawal of relief measures and new pressure emerging from the war could lead to a rise in defaults. We shall continue to monitor these vulnerabilities in the medium term.
In China, after the State Council issued a slew of policies to stabilise economic growth, it immediately required all relevant departments to issue details of the policies before the end of May, and asked governments to speed up the implementation. A team will be sent to inspect and to ensure the policies were effected. These moves demonstrate to us the determination of the Chinese government in their efforts to stabilise and stimulate the economy. A strong fiscal and monetary policy response remains necessary to bring the Chinese economy back to recovery.
China’s official manufacturing and non-manufacturing Purchasing Manager’s indices remained in contraction in May amid prolonged pandemic lockdowns in Shanghai but the stronger-than-expected rebound from April suggests that China can recover quickly as lockdowns are being lifted. We expect to see further recovery in the coming months. With the country’s economic situation at a point so dire, things are starting to look up for the market. We are seeing a lot more quality companies with cheap valuations. If policies deliver as we expect, that could mean we have probably seen the bottom of the Chinese market in the last quarter. We are encouraged and optimistic as the growth companies are trading at much cheaper valuations than their global peers in the developed markets. Based on the valuation of Hong Kong and Chinese equities, it appears undemanding and we see long-term investment value emerging over a 12-month investment horizon.