China’s real estate sector was again front-and-centre this week with news that the government had loosened restrictions on home purchases, encouraged lenders to reduce interest rates and lowered stamp duty on stock trading.
Shares in Country Garden, a listed developer often viewed by investors as a proxy for the health of the Chinese real estate sector, surged 14.6% in response, clawing back some of the ground lost in August amid fears of a default.1 Broader Chinese markets also initially rallied before falling back through the remainder of the week as new data flagged a steep decline in both exports and imports in August.
Developments in the rest of the world also offered a mixed bag for investors. An agreement by Saudi Arabia and Russia to cut oil production saw the price of Brent Crude hit US$90 a barrel for the first time this year, stoking expectations of a further up-tick in short-term inflationary pressures.2
US data pointed in a similar direction, with US jobless claims falling unexpectedly in the latest sign of resilience in an economy seemingly impervious to Fed tightening.
Europe, by way of contrast, saw weaker PMIs while Germany’s industrial production fell for the third month in a row in July.
Electric vehicles sold in China
For Lewis Grant, Senior Portfolio Manager, Global Equities, the week was all about finding silver linings. He notes that investors seeking an early end to the ‘higher for longer’ narrative were disappointed by both resilient US jobs data and the increased oil price – and that, inevitably, this had weakened the performance of global markets.
“A sustained, constrained macro environment will hamper growth and investor risk appetite,” he says. “As we have seen already this year, in this type of environment companies need a good story, more than just good fundamentals, to break through the macro noise.”
A warning against short-term hype
Some of those good stories, says Lewis, are related to advances in the health and autos sectors: new treatments for diabetes and obesity in the former; and strength in EV sales in China in the latter (see chart above). “AI is not the only hyper-growth story in the market,” he says.
Meanwhile, macroeconomic uncertainty has made for ‘narrow’ equity markets in recent months, with stellar returns for only a select number of individual names and sectors – something Lewis believes is set to continue, at least in the near-term. Nonetheless, he says, a focus on fundamentals should pay off over the longer term for investors who can take a more measured approach.
“Where these ‘good news’ stories coincide with sustainable themes, and where high-quality companies can be found at attractive valuations, we believe there is opportunity,” says Lewis. “Where these themes are driven by hype and hope, we remain cognisant of how quickly sentiment can shift.”
1 Source: Bloomberg, accessed 5 September 2023