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Probably the biggest macro development of the year happened this week and, for once, the news did not come out of the US. Instead China announced a support package for the economy and (surprisingly to me) equity markets. The consensus is that the Chinese property and debt overhang is so big that this package is only a small part of the much bigger solution that will ultimately be needed. But China has been the most unloved and under-owned equity market there is. It is also extremely cheap. So, when you combine a positive surprise with bearish positioning and low valuations, you get a rally:
The policy package included an interest rate cut, a 0.5% cut to mortgage rates and a lowering of the down payment required to purchase second homes from 25% to 15%. There was also talk of a stabilisation package directly targeted at the property overhang.
The policy package also included a Rmb300bn (£34bn) lending package for corporate share buybacks. Imagine if, at the upcoming UK budget, the government announced a £34bn package to help UK companies buy back their shares! Direct support like this for the equity market is a signal for domestic investors to re-engage. This plus the fact that any upwards momentum should draw new local investors in should help the rally continue for a while.
International money managers are also at historically low weightings to Chinese equities (see below for global equity managers and hedge fund positioning). If the current rally continues, they will also be forced to up their weights to offset any under-performance from their China underweights. This money (especially the active long-only part) is typically slower moving so I’d be surprised if much has moved yet.
Good news for China is also good news for a region that could do with a shot in the arm, namely Europe. The Euro Stoxx 50 index is now up over 6% from its September lows. Our European and Asian positions are benefitting either directly or indirectly from the China stimulus which is helping all our clients. For our higher risk portfolios, we are adding some China exposure here. The Trump risk is still out there, but positioning and valuations had been pushed to such extremes we feel there may be more to run here for Chinese equities.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
