Equity Strategy: China continues to fade - reiterate the closing of Eurozone vs US trade

Speaker: Mislav Matejka, CFA, Head of Global Equity Strategy

After a sharp ~60% rally during Nov-Jan, on the back of the reopening drive, MSCI China has lost 20% since. The latest China economic numbers, for April, have underwhelmed, including IP, retail sales and FAI. This is joining peaking PMIs, 20% lower iron ore price from highs, as well as a big slowdown in China CESI. The concern is weak confidence, which has restricted the broadening of recovery. The consumer might not get stronger, FAI and property are both structurally challenged, the external backdrop might not help and geopolitics could stay tough. Furthermore, our economic team does not anticipate any meaningful new stimulus measures for the rest of the year. Internal consumer mobility metrics have fully recovered, such as subway ridership and domestic flights. Unlike in the US and Europe, there might not be much pent up demand, as Chinese consumers didn’t enjoy significant cash transfers during Covid lockdowns, and there are reports of wage cuts in certain industries. The property market has stabilized, post the sharp fall in activity, but new land sales are lower 30% ytd. The house prices are at risk of weakening. Tier 1 house prices in China are not dissimilar to what was observed in Japan in 1990, in terms of affordability. FAI and infrastructure spend could continue to lag, absent a fresh policy stimulus. FAI shares of GDP remain very high, compared to other countries. We believe that China exposure baskets might keep disappointing and more broadly we remain UW Value vs Growth style this year. China reopening was one of the big supports for Europe trade, where Eurozone beat the US by 30%+ since last September to most recently, in USD terms. The likely China rollover is one of the reasons why we decided to cut this trade earlier in the month. With this closure, we have the OWs on the following regions globally: Japan, UK and Switzerland.

This podcast was recorded on 29 May 2023.

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