In this week’s markets wrap-up from Federated Hermes, Sandy Pei explains why there are still investment opportunities in China, while Karen Manna discusses what is driving the US Treasuries market.
Sandy Pei, Senior Portfolio Manager at Federated Hermes Limited, said:
Before Liberation Day, China was at the end of an extended economic downcycle, showing signs of improvement due to policy shifts since September 2024 and a recovery in business confidence following the DeepSeek event. The MSCI China equity index had its best quarterly earnings in Q4 2024 in three years, delivering low teen earnings growth for the year. Chinese equities were valued at a near-record high discount to global equities, with growing earnings and improving ROE.
The property-related drag decelerated with stabilizing prices and much lower inventory levels. The GDP contribution from properties halved to 15% from 30% at its peak. Low-end manufacturing had been moving away from China to lower-cost regions for a long time. Supply chain restructuring led many international and Chinese companies to build capacity both within China for domestic needs and outside China for global needs. High-end manufacturing has grown rapidly and is poised to surpass property as a larger part of the economy. Consumption has grown consistently in absolute value, and consumer confidence can recover with more stimulus and social welfare reforms initiated by the government.
China is undergoing a painful transition from a low-quality to a high-quality growth model. Expectations have been reset, with the biggest economic shock potentially already behind it. The newly added tariff will undoubtedly create more uncertainty, with consensus forecasting a negative 1.5% to 2.0% impact on China’s GDP in 2025. However, faster and larger stimulus could offset some of this impact.
The China equity index has less exposure to exports than the underlying economy, resulting in less earnings impact. Listed companies maintain strong balance sheets and cash flow, with high dividend yields and stock buybacks offering attractive returns for domestic investors in a low-interest-rate environment. As China has been a consensus underweight for global investors, incremental selling pressure is limited despite some near-term volatility.
Karen Manna, Investment Director for Fixed Income at Federated Hermes, said:
US Treasury yields increased sharply after falling leading up to and immediately after the April 2 tariffs announcement. The tariff reprieve on April 9 initially quelled the surge, but rates remain elevated. The surprise is that typically when global risks increase, the flight to quality trade ensues – UST yields go down, prices go up and the dollar gathers strength. The opposite has occurred on all accounts.
To add to the confusion, markets began to price in more Fed cuts for the year, as fear of the tariff-prompted slow down grew into increased expectations of a full-blown recession. But the trend up in rates, and the Federal Reserve’s current tone doesn’t quite match that budding expectation.
So, what might be causing the paradoxical upward pressure on yields? A number of issues are likely prompting the move, such as foreign owners of UST selling, hedge funds and other large investors may be forced sellers, doubts and lack of confidence in American “economic” exceptionalism are exploding, and the markets expectations of how to price risk have shifted.
Overall, the only known is the uncertainty which begets volatility. The market is pushing for agreements and improved certainty across the board.
