Market Pulse
Friday, September 27, 2024
Welcome to this week's Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Our three stories this week:
1. China’s Stimulus Blitz
2. Could a Trump Win Boost Stocks?
3. Controlled Descent: UK and US Rates Diverge
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Amid persistent fears about the country’s ailing economy, the Chinese government unveiled a major stimulus package this week designed to accelerate growth and boost financial markets. The People’s Bank of China is set to cut short-term interest rates and slash reserve requirements for banks, both of which should free up liquidity in the financial system. Specific measures targeting the country’s flagging property sector, meanwhile, should reduce mortgage costs for individuals.
While China has so far managed to avoid a significant contraction, repeated economic turbulence this year has called the government’s 5% growth target into question. This month, measures of retail spending, factory output, and investment all fell by more than anticipated. A slow-moving real estate crisis, meanwhile, has threatened to ensnare both financial institutions and local governments.
Immediately following the stimulus announcement, Chinese markets boomed, with the Shanghai index climbing more than 4% for its best day in four years. Despite optimistic initial reactions, the true success of the stimulus package ultimately depends on China’s long-term growth rate.
Even for investors without holdings in China, the sheer scale of the country’s economy means that its growth and resiliency remain relevant for investment performance. About 7.6% of the S&P 500’s earnings comes from China, a figure that averages even higher for technology companies.
Similarly, while our Flagship portfolio does not hold any Chinese equities, we do hold companies with significant revenue exposure to the country. Currently, LVMH, Rio Tinto, Intel, and Apple are our highest Chinese exposed names. These stocks should benefit from the latest stimulus package to the extent it can meaningfully lift China’s growth.
Looking toward the future, we don’t anticipate that this week’s measures will necessarily solve China’s woes. They are a meaningful indication, however, that officials recognize the problems plaguing China’s domestic economy and are willing to step in to provide the support necessary.
This year’s US presidential election has been a source of persistent uncertainty for many asset managers, especially as polls narrow between Trump and Harris. A recent survey of institutional investors, though, indicates that a Trump presidency is widely expected to be more bullish for equity performance.
According to the poll, about half of managers would increase US equity exposure in the event of a Trump victory, compared with just 28% in the event of a Harris victory. While the impact on bonds was less pronounced, investors also indicated that they would reduce fixed-income exposure if Trump wins.
While the idea that a Trump presidency will be good for American business is a common narrative, the world is a far different place than it was in 2016. Tax rates, one of the main mechanisms by which Trump could help boost markets, are already substantially lower than they were when he first took office. Moreover, given a high national debt and increased geopolitical tension, the risks of a misstep owing to Trump’s leadership style are greater.
In any case, asset managers may be putting too much weight on the importance of America’s next president. While past data is no guarantee, US equity markets tend to rise regardless of which party holds the presidency. In fact, the historical record favours Democrats when it comes to stock performance.
While we are by no means ignoring the potential impacts of the US election, considerations about America’s next president remain a small factor in our Flagship allocation decisions. We build Flagship as an all-weather macro vehicle, not as a tool to bet on any specific outcome. And, when it comes to the US presidency, the track record shows that certain outcomes may not matter as much as we’d expect.
While central banks around the world now recognize the need to lower interest rates to support their respective economies, the pace of that decline will not be uniform. Nowhere is this more evident than comparing the US and the UK, with the latter appearing far more patient to cut rates than the former.
Shortly after the Federal Reserve’s rate cut last week, the Bank of England decided to keep its own policy rate steady, emphasising its intention to move slowly. In line with that messaging, markets generally expect the spread between Gilt rates and Treasury rates to continue to climb.
There are three core reasons that UK rates are likely to fall slower than US ones. The first has to do with the long memory of the ‘Truss Moment’ two years ago when wide-ranging unfunded tax cuts sparked a rise in Gilt yields. While the current Labour government is attempting to earn a more fiscally responsible reputation, the risk premium stemming from the Truss Moment will help keep rates elevated.
Next, inflation has proven somewhat stickier in the UK Both core inflation and services inflation measures remain marginally higher in the UK than equivalent figures in the US, meaning that the risks of resurgent inflation thanks to premature rate cuts are also higher.
Finally, if growth continues to chug along, the UK may not need as much monetary support as peers. This week, the OECD upgraded Britain’s growth forecasts for the next two years thanks to resilient fundamentals. Admittedly, growth averaging around 1% remains lower than policymakers might hope for – but it’s still a far cry from contraction and recession.
For consumers, relatively higher rates in the UK may be frustrating, with asset financing likely to remain expensive. For investors, though, they could be beneficial. Higher rates in a country are connected with greater expected investment returns. When combined with the attractive valuations of UK stocks, we are paying close attention to how this rate divergence trend may create opportunities for increased positioning in Britain.
Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.
