The US market has stabilized and is currently enjoying an appreciation after the latest debt ceiling raise, calming nerves among investors. We are not as optimistic as there are still economic concerns still unresolved ranging from the still stubbornly high inflation, continued monetary tightening stance, weakening growth prospects to the wobbly banking sector. Furthermore, there is ongoing wrangling between US and China on various fronts, which may culminate into something negative in the long term. We are also monitoring the current market rise with some caution, as it was driven by only a handful of names in large cap growth stocks, while company earnings continued to be pressured by the negative impacts of credit tightening.
One of the biggest economic surprises of the year was China’s speedy reversal of its zero-COVID policy. Yet despite a strong rally since last October’s low, the Chinese market has given back most of this year’s gains. Concerns over the robustness of China’s economy and geopolitical risks have weighed on the market.
In our view, increased clarity on geopolitical risks and an earnings recovery should act as catalysts for Chinese equities in the months ahead. Sentiment can turn quickly in a market trading at depressed valuations. Market sentiment on China’s growth outlook has soured of late, in contrast to the burst of optimism after the end of Beijing’s zero-Covid policy. We believe the Chinese economy’s cyclical upturn is intact. The latest result releases have shown major Chinese companies reporting strong sales and earnings, and the profit recovery would continue to accelerate. The PBOC cut the 7-day reverse repo rate by 10 bps to 1.9% from 2.0% and the Medium-Term Lending Facility rate from 2.75% to 2.65%, a signal that the government is intent on shoring up the still-weak economy. We have little doubt that Chinese stocks are currently near its historic low and there isn’t much downside. Confidence would eventually return from continued recovery in both the economy and corporate earnings for the rest of the year.
Markets will continue to be buffeted by tension between China and the US and its allies. This is an issue market participants have to be aware of and endure for a long time to come. We think there would not be any letup by either country, especially on the Taiwan issue.
In our view, major power conflicts remain a tail risk due to the restraining influence of nuclear deterrence, and the likelihood of a direct military conflict between US and China remains a remote possibility. However, geopolitical rivalry and tensions will continue to escalate, spurring increase in defence expenditure, intensified competition over strategic commodities, and a shifting economic advantage towards neutral countries.
In other areas, Beijing instituted a ban on Micron Technology Inc in an escalating semiconductor war. Concurrently, the Group-of-Seven leaders meeting in Japan pushed ahead with efforts to reduce dependence on China for critical supply chains. Furthermore, there are talks of a potential US executive order limiting outbound investment to sensitive high-tech Chinese sectors, igniting fears that this measure could be broad in scope which could affect many companies in both countries. “Non-hot-war” news like this would be our focus, as these are highly probable events that would eventuate between the two superpowers of the world.