Market Insights – July 11, 2022

Each week, our Investment team shares its market views with you !

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Economic newsflow from Germany – a country that’s highly dependent on Russian gas – has deteriorated sharply since the war in Ukraine broke out. But against all expectations, new manufacturing orders were up 0.1% month on month in May, reversing the trend recorded in the previous three months.

Commodities lost ground last week as recession fears gathered pace. After the recent correction, commodities sentiment indexes are at their lowest since 2009. But we don’t think economic conditions justify such a sharp decline in prices. We are therefore still buying on the dips.

The US jobs market remained extremely robust in June. Unemployment was unchanged at 3.6%, in line with expectations. Wages continued to climb, up more than 5% year on year, and 372,000 jobs were created, with strong growth in the services sector.

Asia-Pacific – to each its own set of challenges

We’ve now transitioned from a period when all world economies were grappling with the same problem – namely, the COVID-19 pandemic – to one in which each country is faced with its own set of challenges. Some are having to deal with rising inflation, some are trying to cool overheating economies and mitigate the effects of higher interest rates, and others, like China, are just now emerging from the pandemic’s most recent wave and are attempting to stimulate their economies at any cost.

While Beijing appeared to adopt a more accommodative stance on economic policy in November 2021, the stimulus measures that followed were unconvincing and inconsistent with policymakers’ supportive statements. But more recently, given the damaging effects of the country’s lockdowns and the uncertainty caused by the war in Ukraine, the government has had no choice but to take more aggressive action. Today, Chinese policymakers seem just as determined to reboot China’s economy as the US Federal Reserve is to fight inflation in the States.

The Chinese government is taking steps on several fronts, deploying a combination of monetary policy adjustments, new fiscal incentives and an easing of the regulatory crackdown on the tech sector. Beijing even surprised analysts by shortening the quarantine requirement for foreign travellers from three weeks to ten days. The People’s Bank of China has lowered its benchmark mortgage lending rate twice since mid-May, marking the first step in this cycle to support the country’s property

Until now we’ve been cautious on China, waiting patiently with our “finger on the trigger”. But in light of the government’s more convincing, whatever-it-takes stimulus measures, we now have a more constructive outlook – both on domestically listed A shares and on tech stocks, which have significant potential to rebound considerably, even though the prospect of another lockdown in the coming months can’t be ruled out completely, as the emergence of a number of subvariants since early July has shown. On the other hand, Taiwan and South Korea – two of the region’s most cyclical markets and the most sensitive to trends in the global economy – are more likely to feel the effects of the shift to tighter monetary policies in industrialised countries.

UK – a blessing in disguise?

After a wave of ministerial resignations and a whole swathe of scandals, Boris Johnson finally had to stand down. Pound sterling, which is a good way of gauging political stress levels, rose on the news. There are several reasons to think the upcoming changes will be for the better. Boris Johnson is leaving behind a very divided Conservative Party that still has some very complex issues to deal with, such as Brexit’s Northern Ireland Protocol and Scottish independence. At the same time, the UK is experiencing rampant inflation and rising interest rates, which are squeezing consumers. The decision to find a new party leader rather than calling a general election is a good strategy, as it gives the Tories time to make gains in the polls before the next general election, which is scheduled for January 2025. The prospect of a new prime minister also paves the way for a more conservative fiscal policy and perhaps also an easing of tensions between the UK and the EU. These developments could help to stabilise the pound. That, in turn, should increase the appeal of UK stocks, which have had a rough ride in the recent stock market correction. Until then, investors will first need to regain trust in a stable, competent government after Boris Johnson’s tumultuous time in office.


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