BlackRock Commentary: Taking stock on China

Jean Boivin, Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Ben Powell, Chief Investment Strategist for APAC and Yu Song, Chief China Economist all part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

China’s regulatory clampdown on industries such as tutoring and tech has unnerved global investors. We see little global spillover risk from China’s assertion of greater control over certain industries, even as it potentially leads to market volatility. We remain tactically neutral on China stocks and see further monetary and fiscal policy loosening as beneficial for cyclical assets in China.

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Sources: BlackRock Investment Institute, with data from Markit Economics, July 2021. Notes: The yellow line represents the monthly Markit purchasing managers’ index (PMI) of developed markets, including Australia, Austria, Canada, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, Singapore, South Korea, Spain, Taiwan, the UK and U.S. The orange line shows the monthly Caixin China composite PMI.

 

We see last week’s developments in line with China’s long-term hawkish macro policy stance and regulatory clampdown as the country pursues quality growth. This process is not a straight line, and we see a dovish shift in the near term as economic growth has been losing momentum.

China’s economy returned to its pre-pandemic growth trend in late 2020, but has shown signs of slowing in recent months. China’s Caixin composite purchasing managers’ index (PMI) has dipped from a peak of 57.5 in late 2020 to near 50 in June – still in expansionary territory but below the level seen in developed markets. See the chart above.

Against this backdrop, Chinese authorities have started a dovish shift in near-term monetary and fiscal policy, and we expect them to moderate the pace of the regulatory tightening that has recently rattled markets.

The Politburo of the Chinese Communist Party, which is made up of the country’s most senior leaders, held a key policy meeting last week. It recognized downside risks on growth and the need to cushion these risks by pre-emptively easing its policy stance. We expect China’s broad-based, macro policy stance to loosen further during the rest of the year –including monetary, fiscal and some administrative aspects, and see cyclical assets potentially benefitting. Yet we expect a measured approach from policymakers. The Politburo’s meeting statement struck a slightly dovish tone on regulatory policy, and we see this as a reflection of the pragmatism of China’s leadership after recent regulatory moves led to market volatility.

This does not imply a fundamental shift in the regulatory policy stance, in our view. We believe the regulatory clampdown will likely go on for years, yet its intensity will fluctuate. China’s leadership sees regulatory tightening in sectors such as tutoring and technology as necessary to rein in the industries that have been rapidly growing and lightly regulated, which has led to concerns about control of data, inequality, and the rising costs of education, housing and healthcare, in our view.

Keeping tabs on Chinese policy priorities will be key. Our take: Chinese authorities will likely balance their regulatory agenda against a desire for economic stability, and the intensity of the regulatory crackdown may ease amid slower growth and market volatility. Yet Beijing’s targeted regulatory actions may still inadvertently trigger episodic market volatility, as witnessed in recent weeks. China’s policymakers are loosening policy for the near term, but we expect them to stick to a medium-term hawkish stance – key to Beijing’s effort to focus on the quality of growth. Uncertainties around Beijing’s hardened stance on selected sectors – not growth concerns – were the main reason for recent market anxiety, in our view. We expect the regulatory clampdown to continue, but its pace and intensity may moderate as policymakers weigh its impact on growth and markets.

The bottom line: We remain neutral on Chinese equities tactically, but are seeing opportunities emerge in sectors that benefit from monetary easing or are less prone to regulatory tightening. We stand by our strategic preference for Chinese assets. The case for Chinese government bonds in particular is undimmed, in our view, and remains a key strategic overweight in a low-yield world. We recognize implementation of our asset views will differ across investor types and geographies, depending on objectives, constraints and regulation.

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Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of July 29, 2021. Notes: The two ends of the bars show the lowest and highest returns at any point this year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI USA Index, MSCI Europe Index, Bank of America Merrill Lynch Global High Yield Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Refinitiv Datastream Germany 10-year benchmark government bond index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream U.S. 10-year benchmark government bond index and spot gold.

 

Market backdrop

The Fed as expected acknowledged further progress toward its goals but still sees some way to go before it can begin talking about a tapering of asset purchases. We see tapering unlikely to start before early next year given the Fed’s intention to provide ample notice. The U.S. Senate voted to advance a nearly $1 trillion infrastructure bill that delivers $550 billion in incremental new funding for public transit, roads and bridges, and other physical infrastructure.

Week Ahead

  • August 2 – U.S., China, euro area, UK, Japan manufacturing PMI

  • August 4 – U.S., China, UK, Japan services PMI; euro area composite PMI

  • August 5 – Bank of England monetary policy decision

  • August 6 – U.S. nonfarm payrolls

U.S. nonfarm payrolls data will be in focus. Consensus forecast expected an increase of 900,000 jobs in July, according to Refinitiv, after posting the largest monthly gain in June on the back of a strong growth in services sector.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of August 3rd, 2021 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


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Notes from the Trading Desk – Franklin Templeton

Franklin Templeton’s Notes from the Trading Desk offers a weekly overview of what their professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland, with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

The Digest

Global equities traded weaker overall last week with much of the focus on the latest round of corporate earnings releases, which look good so far and were surprisingly positive. It was also a week where China widened its regulatory net on big technology companies, which weighed on market sentiment, leading equities lower overall by the end of the week. The vaccination programme in Europe was praised as data on infections appeared to make a much-needed reversal, calming any investor fears. The Federal Reserve (Fed) was in focus, as Chair Jerome Powell delivered a suitably dovish message. Overall, the S&P 500 Index closed the week down 0.37%, the Eurostoxx 600 Index closed the week up 0.05%, whilst the MSCI Asia Pacific Index closed the week down 1.8%.

COVID-19 Trends Improving in Europe

COVID-19 remains a key market risk, but data on infections in Europe have improved quite dramatically in the last couple of weeks, driven primarily by a turnaround in case numbers in the United Kingdom. Cases there surged through May and June at an alarming rate, but a combination of vaccination progress and herd immunity has seen those numbers start to dramatically reverse, and the impact of the vaccinations can quite clearly be seen when we look at the latest data on the demographic split of infections. The age group with the highest vaccination rate, those over the age of 70, saw only a modest increase in cases during the Delta wave, although cases among age groups who are unvaccinated or have seen lower levels of vaccination saw a sharp increase.

Crucially, there are no signs that the healthcare systems across Europe are struggling to cope, with hospitalisations remaining at relatively low levels despite the Delta variant. In Portugal, 96% of positive cases are of the Delta variant, whilst in Spain, it is 92% and in Italy 88%. An increase in the vaccination intensity in the European Union (EU) has helped. The number of patients needing intensive care is rising modestly in countries where the Delta variant is most prevalent—mainly the United Kingdom and Portugal. However, we are not seeing the bottlenecks experienced at the start of the year.

This all leads some to wonder whether the recovery rally in Europe has peaked for now.

Week in Review 

Europe

Last week was mixed for equity markets in Europe, with the focus firmly on second-quarter (Q2) earnings. Sector divergence was more notable than it has been of late. The Eurostoxx 600 Index closed the week near flat. Just over half of the Eurostoxx 600 Index companies have reported quarterly earnings so far, and it has been a positive earnings season overall. As noted, the signs on COVID-19 are improving in Europe and there is hope that the worst of the Delta wave may soon be over. Sector and stock composition drove most of the country-level index moves last week. The Italian FTSE MIB Index outperformed in Europe, up 1.0%, following strength in some of its key constituents. The German DAX lagged, down 0.8%, following underperformance from some of the German bellwethers.

In terms of sectors, the basic resources outperformed, up 3.7% on the week, despite losing 2.3% last Friday. The strength comes on the back of earnings beats for Anglo American and Arcelormittal. Strength in the sector in Europe came as the equivalent materials sector in Australia traded near all-time highs. Friday’s weakness came following a drop in iron ore prices and after a soft update from Glencore. Oil and gas stocks were also higher last week on the back of supportive earnings and higher oil prices. In terms of notable laggards, travel and leisure saw some healthy profit-taking, but the sector still awaits its next big catalyst. As infection rates improve across Europe, the Goldman Sachs Going Out basket finished the week up 0.7%, whilst the equivalent Stay at Home basket finished down 3.1%.

We are just over halfway through earnings season and Q2 reporting has been strong. In Europe, 64% of companies which have reported so far have beaten earnings-per-share (EPS) expectations, a historically elevated level, but below the record high of 67% reached in the first quarter (Q1). The bulk of the strong earnings can be attributed to the rebound in energy stocks; 67% of companies have beaten on sales, leaving this on track to be the best season in terms of sales beats in over a decade. Revenue growth in Europe is also so far beating expectations.

The number of times “inflation” is mentioned in the earnings reports of Eurostoxx 600 companies has also increased sharply, with some media outlets stating it marks the biggest jump in the use of this term on record. At the sector level, inflation mentions are most prevalent among financials, consumer staples and materials.

United States

Despite upside corporate earnings surprises, US equities closed last week lower overall. The S&P 500 Index closed the week down 0.37%, the Dow Jones Index was down 0.36%, whilst the Nasdaq was down 1.1%. Tuesday was the weakest day for the Nasdaq in over two months amidst rising Chinese regulatory uncertainty. The Fed was in focus on Wednesday, but Powell’s commentary ended up being pretty much in line with expectations. Interestingly, while US equities held up well, CNN’s Fear and Greed Index moved into “Extreme Fear” territory last week, likely based on safe-haven demand, with high put buying and stock price breadth.

Last week was the busiest week of US Q2 earnings season and 296 of the S&P 500 companies have now reported. Q2 EPS is now tracking better than expectations, and EPS growth is now expected to exceed 80% year-over-year (y/y). US revenues have also been coming in higher than expected. Similar to Europe, mentions of “inflation” also accelerated in US earnings reports, including mentions of labour inflation, which points to increased wage pressure.

Eyes were on Powell’s press conference last week on Wednesday as investors sought any hints towards tapering; the lack of such language led to a relief rally in US equity markets. More details are expected at “coming meetings”. Other takeaways included: the Fed wants to see strong job numbers; inflation is running well above the 2% objective and will likely remain like that in the short-term; and Powell sees less economic impact with every wave of the virus, despite the still-unknown impact of the Delta strain. He also commented that “high inflation and high employment tend to go together”, but the US economy is in a transitory period with low employment numbers even though job vacancies are high. The job market is strong and is expected to pick up.

Asia-Pacific (APAC)

Last week saw notable underperformance for Asian equities as weakness in mainland China as well as Hong Kong equities weighed on the region. The MSCI Asia Pacific Index traded down 1.8% on the week.

Hong Kong’s equity benchmark was down 5% and stocks in Shanghai were down 4.3% last week amid a continuation of the recent crackdown by Chinese authorities on technology stocks. Of note, we saw China’s US$100 billion private education industry targeted by authorities, who announced a broad set of reforms. In addition, the Chinese Ministry of Industry Information Technology targeted a number of China’s largest technology companies, including Alibaba and Tencent, directing them to carry out internal reviews and address issues such as data security.

This follows on a number of other recent measures from Chinese authorities—such as targeting Didi a few weeks ago—so sentiment in this space was already brittle. As a result, we saw aggressive selling of tech names last week. For example, last Tuesday when markets moved lower, the overall volume for Hong Kong’s exchange was HK$361 billion, the highest on record. Significant value has been lost in Hong Kong and Chinese equities over July, around US$1.5 trillion, according to Bloomberg. In the United States, the Nasdaq Golden Dragon China Index (basket of US Chinese technology listings) fell 22% in July, its biggest monthly fall since 2008.

Meanwhile, Japanese equities fell 1% but still outperformed regional peers. Some suggest this may be a so-called “safe haven” play, given the issues with Chinese equities.

South Korean equities declined 1.6%, but it is worth noting a positive geopolitical development, as South and North Korea agreed on reactivation of inter-Korean hotline, helping the steel and construction sectors outperform.

Week Ahead

Macro Highlights

The Bank of England (BoE) is likely to steal all the economic headlines in Europe this week. The central bank is set to unveil new forecasts and formally adopt negative interest rates as a policy tool. It’s almost certain to keep policy on hold. Outside of that, Germany’s industrial output and factory orders data for June will offer additional detail on the extent to which the sector is being hampered by supply chain issues.

Monday 2 August

  • Spain manufacturing Purchasing Managers’ Index (PMI)
  • Italy manufacturing (PMI)
  • France manufacturing PMI
  • Germany manufacturing PMI
  • US manufacturing(PMI)
  • China Caixin PMI
  • Japan PMI, consumer confidence

Tuesday 3 August

  • Spain unemployment change
  • Eurozone producer price index (PPI)
  • US factory orders
  • Japan Consumer Price Index (CPI)

Wednesday 4 August 

  • France budget balance year-to-date
  • UK official reserves changes
  • Eurozone retail sales
  • US ADP employment

Thursday 5 August

  • France industrial production (IP)
  • BoE rate decision
  • Germany factory orders
  • UK new car registrations
  • US jobless claims & trade balance

Friday 6 August     

  • Germany IP
  • Spain IP
  • Italy IP
  • France trade balance & current account balance
  • US July employment report

 


Franklin Templeton Key risks & Disclaimers:

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. Past performance is not an indicator or guarantee of future performance.

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of 2nd August 2021, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security. Nothing in this document may be relied upon as investment advice or an investment recommendation. The companies named herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FT affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. 

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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