This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
China’s stimulus adds to the market’s optimism
Last week, China unveiled a surprise package of stimulus measures to boost its economy and stock market. The People’s Bank of China (PBoC) cut interest rates, lowered banks’ reserve requirement ratios and relaxed mortgage policies. It also announced it would support the stock market by helping firms buy back shares and allowing them to use their own shares and other financial instruments as collateral to borrow liquid assets from the PBoC. In addition, the Politburo, the highest political body of the Central Committee of the Chinese Communist Party, vowed to issue new bonds to stimulate domestic consumption and stabilise critical sectors such as the property market so that economic growth meets the 5% target this year.
The combined announcement of monetary and fiscal measures marks a significant change in Beijing’s approach. During the three-year-long property bust and post-pandemic slump, Beijing only worked in small monetary easing increments to support growth, which led to a loss of domestic and foreign confidence.
This time around, these measures have triggered a round of optimism on Chinese assets. The Shanghai Shenzhen CSI 300 index skyrocketed by around 15%, as did the Hong Kong-listed indices, the Hang Seng Index (HSI +13%) and Hang Seng China Enterprises Index (HSCEI +14%). In the currency space, the Chinese yuan appreciated 0.6%. The rebound in Chinese assets lifted regional equity markets, too, from India to Japan. Overall, the Morgan Stanley Capital International (MSCI) Emerging Market equity index ended the week 5% higher. Commodities also gained. Industrial metals rose by more than 5%, and gold continued to rise, too, supported by strong demand and prospects of lower interest rates.
US interest rate cuts and a weaker US dollar support emerging markets
The weakness of the US dollar, which has been one of our key views of 2024, is playing out and is likely to continue, following the start of the US Federal Reserve’s (Fed) interest rate-cutting cycle two weeks ago. For the emerging market economies, this is good news as emerging market central banks can now support growth without weakening their currencies versus the US dollar. We saw this as early as last week in China, for instance. To put this into context, the US dollar index (DXY) is down 0.5% in 2024 (more notably, it’s 5.5% down from the highs of April), while the MSCI Emerging Market Currency index is up 2.6%.
We think the combination of the new rounds of stimulus in China and a weaker dollar will likely be a renewed tailwind for emerging market assets. Despite owning slightly more equities than usual, we currently hold a neutral allocation to emerging market assets, both in equities and bonds. We are reviewing these positions. That said, for now, the lack of details on the Chinese fiscal front still calls for some caution. In addition, the US dollar is facing a strong level of support that’s been holding since late 2022. A break below 100 for the DXY could point to more weakness, opening the door to a more meaningful rise in emerging market assets. So far in 2024, developed market equities (+17%) have outperformed their emerging market peers (+13%).
What we’re watching this week
This week, we’ll watch the
Institute of Supply Management (ISM) surveys on both manufacturing (Tuesday) and services (Thursday) activity in the US to gauge the confidence of businesses. With inflation seemingly under control, the Fed made clear it’s now looking after the labour market. Markets will be closely watching private-sector and nonfarm payroll data (Wednesday and Friday, respectively), as well as job openings (Tuesday). Worse-than-expected labour market data could revive fears that the economy is slowing more than expected. If they come in better than expected, the market could reduce its expectations of interest rate cuts. However, given that it currently expects more cuts than the Fed is projecting, it could just be an alignment of expectations, which wouldn’t be a bad thing.
In Europe, the purchasing managers’ indices for both manufacturing and services activity came in weak last week. Price pressures also eased. This week (Tuesday), inflation in the eurozone for September is expected to fall to the 2% target. We think this increases the odds that the European Central Bank (ECB) will cut rates at its October meeting. More ECB cuts should support European government bonds and investment grade (high quality) corporate bonds, as well as European equities – we hold an overweight position in all these markets.
Important Information
Information correct as of 30 September 2024.
This document is designed as marketing material. This document has been composed by Brown Shipley & Co Ltd ("Brown Shipley”). Brown Shipley is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales No. 398426. Registered Office: 2 Moorgate, London, EC2R 6AG.
This document is for information purposes only, does not constitute individual (investment or tax) advice and investment decisions must not be based merely on this document. Whenever this document mentions a product, service or advice, it should be considered only as an indication or summary and cannot be seen as complete or fully accurate. All (investment or tax) decisions based on this information are for your own expense and for your own risk. You should (have) assess(ed) whether the product or service is suitable for your situation. Brown Shipley and its employees cannot be held liable for any loss or damage arising out of the use of (any part of) this document.
The contents of this document are based on publicly available information and/or sources which we deem trustworthy. Although reasonable care has been employed to publish data and information as truthfully and correctly as possible, we cannot accept any liability for the contents of this document, as far as it is based on those sources.
Investing involves risks and the value of investments may go up or down. Past performance is no indication of future performance. Currency fluctuations may influence your returns.
The information included is subject to change and Brown Shipley has no obligation after the date of publication of the text to update or amend the information accordingly. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it.
This is non-independent research and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
All copyrights and trademarks regarding this document are held by Brown Shipley, unless expressly stated otherwise. You are not allowed to copy, duplicate in any form or redistribute or use in any way the contents of this document, completely or partially, without the prior explicit and written approval of Brown Shipley. Notwithstanding anything herein to the contrary, and except as required to enable compliance with applicable securities law. See the privacy notice on our website for how your personal data is used (
https://brownshipley.com/en-gb/privacy-and-cookie-policy).
© Brown Shipley 2024