By Marcus Weyerer, senior ETF investment strategist EMEA at Franklin Templeton
China’s latest Ministry of Finance press conference may have lacked specific measures to directly support consumption, but the unexpectedly large size of China’s fiscal stimulus package has done a great deal to boost investor confidence in the struggling Chinese economy.
The measures announced, including new tools for China’s central bank to help companies buy back shares using refinanced bank loans, prompted a rush into Chinese equities in September. Stocks on the Shanghai exchange rose, with turnover reaching $101bn.
Initially, the exchange experienced glitches in order processing and delays, before stocks in China finally recorded their best day in 16 years on the last day of September.
See also: Is China at a turning point, or will it disappoint yet again?
Following China’s latest interest rate cuts, we now see the world’s second-largest economy potentially taking a more targeted route to economic revival. The country’s renewed efforts are designed to help securities firms, insurers and other institutional investors raise funds by clearing their balance sheets.
We view the immediate market reaction to these moves as a strong indicator of not only investors’ appetite for value, but also a sense of FOMO (fear of missing out) that we believe could continue to fuel the market rally.
Short covering may also have played a role in the recent rally. Traders who have suffered heavy losses may be unwilling or unable to bet against the government again anytime soon, which could lend stability to the current rally.
See also: Chinese markets soar following announcement of ‘aggressive’ stimulus package
However, with weak domestic consumption, a troubled property sector and other structural problems still weighing on the Chinese economy, quick fixes seem unrealistic. There is a long way to go, still.
That said, the signal that these measures are sending to the market is the strongest it has been in at least three years and has laid the foundation for a better perception of the Chinese equity market.
External geopolitical risks has created uncertainty, especially in the run-up to the US presidential elections. Talk of a possible trade war between the US and China also continues.
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Yet investors may take some comfort from the fact that, as in recent decades, the US is still likely to have a divided Congress – which may limit far-reaching changes to legislation.
All of this is not to say that we are not encouraged by the Chinese leadership’s new determination to stabilise markets. The measures have already pushed emerging market equities to highs not seen in more than two years.
The Brazilian and South Korean stock markets, both of which hit their year-to-date lows in August, have since rebounded. The same is true for the Mexican market, where equities rebounded after a dip in early September.
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However, this may be a reminder that there are long-term global market opportunities.
While the market focus this week may be on China, and while the long-term case for an allocation to Chinese equities has likely improved with the recent announcements, we cannot overstate the importance of diversification.
Asia and emerging Asia is becoming increasingly bifurcated, a trend we believe will continue. With the global interest rate cycle, the US election and geopolitical fragmentation all adding layers of complexity, we believe that investors should prioritise flexibility and agility in this economic climate.
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We see China’s concerted comeback effort in global markets as a positive signal for the country and the broader region. Long-term trends such as technology leadership, attractive valuations and the expansion of production capacity offer ample opportunities for investors along the risk spectrum.
The road ahead will certainly not be smooth, but the biggest risk for investors could indeed be to ignore Asian markets in their allocation decisions.
