“With China’s strong economic recovery from the pandemic at risk from the Evergrande debacle, investors should look to shore up their defences” says Luca Paolini, chief strategist at Pictet Asset Management.
“Expectations for tighter monetary policy are intensifying, but higher interest rates are not the only concern for equity markets. China’s strong recovery from the pandemic is now at risk as Beijing battles to avoid the collapse of its most indebted property company Evergrande.”
“We have reduced our forecasts for China’s economic growth by 1 percentage point for 2021-22 to 8.6 per cent as we expect the fallout from Evergrande debacle to spread through the real estate sector.”
“The country’s leading indicator is falling at a 5 per cent annualised rate, the same pace seen in the midst of the Covid crisis in early 2020.”
“That shouldn’t come as a surprise considering real estate and related industries account for up to 30 per cent of Chinese GDP and property makes up more than two thirds of household wealth.”
“Tighter monetary policy has led us to downgrade bonds to underweight while China’s troubles have convinced us to increase exposure to defensive equity sectors and upgrade cash to overweight.”
“We remain neutral on equities but continue to increase our allocation to defensive parts of the market on concerns about rising risks to global growth.”
“With this in mind, we have made two changes to our regional and sectoral equity allocations – we close our short position on Japanese equities, taking them to neutral, and we raise health care to overweight from neutral.”
“Although the fundamental story has not improved from last month in Japan the change of leadership in government, with Fumio Kishida as the next prime minister, opens up the prospect of policy changes that investors have been wanting for some time.”
“More generally in our regional equity allocation, we maintain a strong preference for European equities and remain overweight in UK, euro zone and Swiss stocks.”
“The UK market is the cheapest on our scorecard with a dividend yield in excess of 4 per cent and a good sector mix, dominated by value cyclicals and quality defensive stocks.”
“The Chinese equity market’s 30 per cent underperformance this year has been caused by surprisingly weak corporate results.”
“Twelve month forward earnings are unchanged on where they were last December, even as they’ve climbed by more than 25 per cent in the rest of the world.”
“Earnings momentum has clearly peaked. Our models suggest that earnings growth will continue to decelerate significantly in the coming quarters as the pace of economic growth deteriorates.”
“Globally, we expect inflation to remain above trend and consensus for this year and next – mainly due to strong demand arising from solid job gains and accelerating wage growth.”
“The key is to find areas of the bond market which are best cushioned from inflationary pressure. One such refuge, we believe, is Chinese sovereign debt.”
“We expect further stimulus in China, including liquidity injections and cuts in the reserve requirement ratio (RRR). In the US, meanwhile, bond purchases should soon be tapered and rate hikes may start by the end of next year.”
“Among the areas most vulnerable to rising bond yields are growth-orientated equity markets and sectors. The biggest beneficiaries, by contrast, would tend to be value-cyclical sectors and regions, such as financial stocks and Latin American equities.”
“We forecast that global equities will return some 6 per cent annualised in US dollar terms over the next five years – less than half of the total return annualised over the past decade.”
