Market Outlook - August 2023

The major occurrence in China in July was the annual Politburo meeting. The participants announced a few key measures (both fiscal and monetary), namely continued support to the property sector, boosting consumption and restoring youth employment. These announcements were encouraging given the focus on critical issues in the country, however there were only a few details released on how the administration plans to execute these measures. We believe that the government has the capacity to act in a forceful way given their low national debt to GDP levels relative to other developed nations.

In the US, consumer spending continues to weaken, albeit at a much slower rate than expected. We are closely watching the resumption of student loan repayments from October onwards as this could have an immediate impact on consumption. Having said that, the overall US economy may be supported by one-off infrastructure spending in the near-term as evidenced by the recent GDP reading, spurred by major acts announced in preceding years such as the Bipartisan Infrastructure Bill, CHIPS Act and Inflation Reduction Act.

In general, we are finally seeing the highly anticipated slowdown in business activity and consumption globally, showcased by continued and deepening declines in export growth at major manufacturing countries. Thus far, the downtrend is not alarming with economists expecting a turnaround within the next twelve months. During this timeframe, current analysis suggests that businesses should have fully exhausted their existing inventories that they piled up over COVID-19, and therefore will have renewed demand to purchase again. On the other hand, the waning economy is also expected to cause the Fed to loosen their tight monetary policy, thus freeing up further propensity to spend. We will be monitoring these trends closely as we may be reaching a turning point over the coming quarters. This includes how the US Department of Treasury plans to increase the issuance of long-dated US Treasuries in the 4Q 2023.

Corporate earnings across sectors continue to show mixed results as expected, however they are mostly encouraging as both consumer and corporate spending has been more resilient than we originally anticipated. The beneficiaries are companies with a strong competitive position where they showed reacceleration in sales and even stronger earnings growth after cost-cutting in 2022. On the other hand, leveraged companies that we monitor are beginning to see the effects of interest rate hikes in a significant way, resulting in heightened borrowing costs offsetting sales growth. Finally, there is increasing pressure from consumers globally for firms to offer more value-for-money products as the cost of living has risen meaningfully since the start of the COVID pandemic. All-in-all the results thus far have been largely in-line or above expectations. We continue to expect outperformance in China once the government has issued clear policies to support their economy, especially on the property sector.