A false dawn for China?

With institutional investors sitting on the sidelines, the upcoming National People’s Congress (NPC) could be key to maintaining the upswing in Chinese stocks.

• The People’s Bank of China (PBoC) cut its headline prime rate to 3.1% from 3.4% this week, adding heat to the rally.
• The upcoming NPC meeting—expected at or around the start of November—could be crucial for providing guidance on future stimulus.
• Ahead of next month’s election, the latest batch of US macro data was broadly positive, with strong consumer retail sales.

Two themes dominated markets this week: the question of China’s nascent stock market rally and the looming US election.

On Monday, the China theme was the focus when the PBoC cut its prime rate to 3.1% from 3.4%—the largest reduction on record. It also cut the five-year rate to 3.6% from 3.9%. 

Chinese indices continued their recent gains in response. The CSI 300 Index—the 300 largest stocks listed on the Shanghai and the Shenzhen stock exchanges—has now climbed 22.3% over the past four weeks[1], making it easily the best-performing major index over that period. The Hang Seng Index, which tracks the largest stocks listed on the Hong Kong exchange, has risen at a less spectacular but still respectable 11.4%. By way of contrast, the US blue chip S&P 500 Index has returned 1.3%.

For Sandy Pei, China Equity Senior Portfolio Manager, Federated Hermes Limited, a key component of the recent performance is the extent to which retail investors and ETFs have driven the gains. In contrast, she says, active and institutional investors are still sitting on the sidelines waiting for a clearer picture on how monetary and fiscal policy might play out. 

“Until then, we believe Chinese equities still have strong valuation support, and that there are still many stock selection opportunities for investors,” she says.

Why the detail matters

James Cook, Investment Director, Emerging Markets, Federated Hermes Limited, agrees that, for many investors, the longevity of the rally remains a concern and notes that China’s upcoming National People's Congress (NPC) meeting—expected at or around the start of November—could be crucial for providing guidance on future stimulus.

This is important, he says, because although previous statements have set out broad plans for stimulus measures, they have been lacking in detail. In mid-October, for instance, the Chinese government announced additional borrowing to help state banks, property, and low-income earners. Similarly, at the most recent Politburo meeting, President Xi Jinping outlined a far-reaching commitment to protecting the economy, property and equity markets from further deterioration—seen as a clear ‘whatever it takes’ statement.

Collectively, this raft of announcements may have lit a fire under Chinese equities but what’s less clear, says Cook, is exactly how far down the stimulus path the government is willing to go in practice—leaving open a door to disappointment for investors piling into Chinese stocks on hopes of a return to blockbuster growth. 

“While the market upswing still represents a positive break from the prolonged period of losses that marred China stocks in the last few years, the market turbulence may be indicative of the extent of the challenge facing officials,” adds Cook.

The US picture

Outside of China, earnings season got off to a strong start. Damian McIntyre, Senior Quantitative Analyst, Federated Hermes, notes that thus far, for the 72 of the 500 names in the S&P 500 Index to have published earnings figures, the average aggregate earnings beat came in at 6.2%, which is ahead of the long-term average beat rate of 4.8%.  

US macro data, meanwhile, has been broadly positive, with strong consumer retail sales, he notes. “The monthly ex-auto and gas measure came in at a growth of +0.7%, higher than estimates of +0.3%. Furthermore, the prior month was revised up to +0.3% from 0.2%. On top of that, initial jobless claims fell from their surprise reading of 260,000 to a more normal 241,000 last week—underlying the theory that the prior week’s reading was likely hurricane related,” says McIntyre.

Meanwhile, with presidential nominees Donald Trump and Kamala Harris seemingly neck-and-neck in the electoral race, investors continue to factor in the consequences of either a Democrat or Republican win. 

Mohammed Elmi, Lead Portfolio Manager for Emerging Market Debt at Federated Hermes, notes that a win for Harris would likely see the status quo largely unaffected. In contrast, a Trump win would have far-reaching implications for foreign policy, generating both opportunities and potential pitfalls for emerging market debt.

“A Trump presidency 2.0 is likely to involve a reinvigorated focus on the Chinese yuan traded in the offshore market,” he says. “Tariffs, meanwhile, are expected on a range of sectors, including Chinese electric vehicles, which could materially hit aluminium and copper prices. It’s also possible that Trump would look favourably on West-leaning governments that are open to capital investment. A prime benefactor in this respect would be Argentina under the leadership of President Javier Milei, who has enthusiastically supported Trump and various US conservatives.”

 
[1] Source: Bloomberg as at 24 October 2024. Returns calculated from 23 September to 23 October 2024. Past performance is no guarantee of future performance.