China has followed four engines of growth: a reliance on exports; massive private investment; a consumer with growing spending power; and public expenditure by the state. However, engine three has been badly hit by a new outbreak of Covid-19 which originated in the country in 2020.
The Chinese authorities now plan massive stimulus, including cutting interest rates at a time when Western countries are raising them, says Graham, Head of Multi-Asset Strategies at Robeco.
“The latest Covid threat to China’s population’s well-being and prosperity has led authorities to implement severe lockdowns in Shanghai and other regions, while less draconian measures were implemented in Beijing,” he says.
“The economic outlook has been decimated, as happens with lockdowns everywhere, and consumers have been driven into hibernation. The Chinese Services PMI registered a reading below 40, indicating a slowdown, resulting in a desynchronization of domestic economy and monetary policy with the rest of the world.”
“Where other central banks have been raising rates and tightening financial conditions, the People’s Bank of China (PBoC) has been cutting rates and easing reserve requirements.”
Fiscal stimulus is also at hand. The Chinese government recently announced plans to increase infrastructure spending by USD 45 billion, give the airline industry USD 52 billion in support, and offer tax rebates worth USD 20 billion to the middle classes.
“The tax rebates appear to be at the right time in the cycle to kickstart growth, unlike in the US, where the government poured more money into an already overheated economy,” Graham says. “Although using these previous stimulation measures is subject to the law of diminishing returns, the package of measures will kickstart the economy coming out of lockdowns.”
“In the near term, the economy will trump the ideology, and President Xi’s vice-premier and prime minister are likely to step down at the 20th Party Conference, allowing the leadership to distance itself from recent dubious Covid-related policy decisions.”
It means China remains an investment opportunity, particularly as commodity demand remains critical to maintaining the country’s status as the factory of the world.
“We continue to believe that China is investible either through commodity and raw material demand proxies such as Latin America and Asia, or directly in Chinese companies,” Graham says. “From our vantage point, we can see that these proxies have priced in a much better outlook for the Chinese economy – in fact, the factories kept running during lockdown.”
“And the consumer will exit the doldrums with ‘revenge spending’, helping the domestically focussed internet and consumer stocks to recover from historically low valuation levels.”
“More broadly, we are experiencing a desynchronised economic cycle, so as China reopens, this should be a shot in the arm to global growth and unlock the value in the unloved assets that are pricing in a too-pessimistic outlook.”
A separate but related area that investors are watching is the US high yield bond market, the only major asset class that has seen net outflows over the past 12 months. High yield bonds are issued by companies that have sub-investment grade credit ratings because their businesses are riskier, making them more prone to default if a recession does occur.
“Recent macroeconomic data releases in developing economies have been indicating slowing growth, and the inflationary scare is morphing into a growth scare, so we are watching the US high yield market with interest,” Graham says.
“Fears that the US Federal Reserve cannot engineer a soft landing are well founded in historical analysis, and given the current levels of inflation and unemployment, we have some sympathy with that view. The counter argument is that the Fed has leeway to cool the excess tightness in labor markets, as a small rise in unemployment could be positive to extending the cycle, by allowing them to pause rate hikes.”
One potential problem is that consumer discretionary stocks are now the largest part of the high yield market, accounting for 20% of issuers, while energy remains at around 14%. “So, high yield remains a very cyclical asset, and levels of employment and consumer spending will be a key driver,” Graham says.
“Outside of a recession, the current yield levels of the high yield markets look attractive, and the growth scare is being priced in. If we look at our core investment scenario, consumer and corporate balance sheets are in good shape.”
“The excesses that we have seen in previous recessions are missing from the obvious places (except maybe government balance sheets) which leads us to think that recession risk is not elevated on a 12-month horizon.”
“We think high yield risks are more symmetric than the recessionary skew that markets are reflecting in spreads today, the default risks are still low, and the Fed will pause its rate hikes later this year. So, we’re not unduly worried for now.”
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage. Third party off-site pages or websites are provided for informational purposes only.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.