November 2024 - THE CIO’S PERSPECTIVE
After the strong rally China had in September on the back of a series of meetings and announcements made with the objective of restoring confidence through economic stimulation, investors were eager to obtain the details in the early days of October. In a typical fashion that has become too familiar, no such details were provided during the month of October, and the market gave back some of the gains of September. It is now believed that concrete measures may, or may not, be announced at the Standing Committee of the National People’s Congress, to be held between 4th and 8th November.
From the various announcements made in October by officials, we already know that the focus will be on fiscal measures to come to the rescue of municipal governments that are running out of cash to the point that they are late on the payment of the salaries of their civil servants and suppliers. Trillions of yuan’s worth of bonds (10 trillion according to Reuters, equivalent to 8% of GDP) will be issued by local governments, and subscribed by state-owned banks, insurance companies and government-controlled asset managers. Hence the planned recapitalisation by the Central government of the six largest banks to help them participate without hitting their capital adequacy ratios.
?The purpose of the exercise is to give local municipalities the cash not only to pay their debt, but also to set a floor on their respective property markets through asset purchases and conversion into social housing. The goal is to restore confidence among the general public, such confidence being very low at present. If everything goes according to plan, it will kick start a rebound in consumption patterns, in the real estate market and in the stock market.
What was made abundantly clear is that there will not be any monetary stimulus in the form of direct subsidies, “cheques in the mail” and other forms of “helicopter money”. It means in essence that whatever confidence in the system could be restored in the future, it will take time, possibly several quarters, before the impact of technocratic fiscal stimulation filters into the economy and ends up making a difference to people in the street. On that front, one key indicator that we follow closely because it impacts so many people is the youth unemployment rate that covers the 16-24 years old who are not at school or university. This statistic that is published every month reached 17.6% in September, its second highest reading after 18.8% in August. It was 14.9% at the end of last year.
Another indicator we follow closely are property sales on the primary market which saw a recent pick-up: In October, the sales of the top 100 real estate companies increased by 10.5% year-on-year and 67.4% month-on-month. Of course, it will take more than a single data point to convince us that the worst has passed. For the first 10 months, the decline in sales of these promoters is -34.7%.
As we expected, the rally we saw in Chinese equities triggered institutional rotation out of India, which was the worst performing market in October. The Sensex index was down 5.4%, and the Nifty 50 index down 5.8% over the month. The good news is that the USD12.6bn net selling by foreign institutional investors in September was met by USD12.1bn of net buying by domestic institutional investors who saw the rare occurrence of a market adjustment to add more exposure to the domestic market. The number of retail investors entering the Indian market through mutual funds is on a continuous upward trend, as can be seen through the Systematic Investment Plan (SIP) used in India by the general public. There were 98.7 million SIP accounts at the end of September, and 5 to 6 million new accounts being added every month.
On the geopolitical side, we cannot underestimate the importance of the agreement reached in October between India and China ahead of the BRICS summit hosted by Russia. The two countries finally ended their border dispute over Kashmir and Ladakh which had seen several instances of military confrontation in the Himalaya, many casualties, and a strong animosity develop between the two governments to the point that India refuses to issue tourist visas to anyone holding a China, Hongkong or Macau passport. Having buried the hatchet, one can easily imagine the consequences a renewed partnership between India and China could have for the two countries, and for the world.
As these lines are written all eyes are turned on the US presidential elections and on the consequences a Trump victory could have for the US dollar, for emerging currencies, for US inflation and USD rates, and for global trade knowing that Trump is ready to impose a blanket 60% tariff on all imports from China. It is possible that the announcements to be made after the NPC meeting in early November could be influenced by the outcome of the US elections.