Global investors are locked in a debate over whether China’s pledges to support its slowing economy will finally revive animal spirits in the market, or fall flat after a fleeting rebound.
(Bloomberg) — Global investors are locked in a debate over whether China’s pledges to support its slowing economy will finally revive animal spirits in the market, or fall flat after a fleeting rebound.
In the more optimistic camp, analysts and money managers see the statement from the Politburo as more powerful with its recognition of key market concerns including the troubled housing sector. But a lack of clear policy actions to repair the economy’s challenges and deep-rooted market pessimism would make a meaningful rebound hard to come by, the skeptics say.
Initial market reactions suggest optimism outweighs, with Chinese stocks rallying and the yuan strengthening on Tuesday.
READ: China’s Markets Throw Off Gloom for Now as Xi Offers Lifeline
While Beijing fell short of announcing large-scale stimulus, it signaled more support for the troubled real estate sector alongside pledges to boost consumption and resolve local government debt issues. Here’s what analysts and money managers are saying.
The Hopefuls:
Fidelity International (Andrew McCaffery, global chief investment officer)
- “Markets have been disappointed as they anticipated more rapid improvement, but they are now beginning to rationalize their growth expectations. Our view is that this somewhat unexciting period will eventually give way to a more positive market tone.”
- “The introduction of further short-term measures should stabilize the employment market and underpin consumer confidence. However, international investors are also looking for policy makers to clarify their longer-term policy framework in areas such as demographic and structural housing issues.”
- “Some of this uncertainty could be cleared up in the next few weeks, which would also help investor confidence.”
Kamet Capital Partners Pte. (Kerry Goh, chief investment officer)
- “What stood out to me was they said targeted but ‘powerful’ measures can be expected. So far, I’ve only heard of ‘modest’ policy stimulus from the government. So the choice of wording is interesting.”
- Market will probably be range-bound until first policy announcement.
- “Let’s see how powerful it is. That will determine the market direction in coming months. What I like though is that they are beginning to understand they need to resuscitate real estate.”
- “China is under-owned and there’s low expectation on government policy moves. We think there’s a need to reallocate to China stocks from the US and other Group of Seven markets following the Politburo statements.”
Morgan Stanley (Min Dai and Gek Teng Khoo, strategists)
- “Overall, we believe that the statement exceeds investors’ expectations: the reaction in the FX market has so far been muted following the statement but we believe that the market would react more positively in the next few days/weeks.”
- “It effectively gives the green light for the State Council to provide more easing measures in the next few weeks. We believe that bad news going forward could be good news for the market.”
The Skeptics:
Leuthold Global Fund (Chun Wang, portfolio manager)
- “We have seen this movie before. The latest policy signal from the Politburo is not surprising, considering the credit/liquidity crunch Chinese property companies are currently facing. The government knows the size of the property problem is way too big for them to bail everyone out.”
- “With banks already laden with previous bad loans, public debt/GDP surging to record high, the government’s ability to put together a large-scale bailout is very limited. In other words, we expect China to only do enough to stem widespread risk contagion, but not much more. Overall, the new policy is not significant enough to serve as a catalyst for a new bull market.”
Australia & New Zealand Banking Group Ltd. (Jennifer Kusuma, senior Asia rates strategist)
- “It’s becoming more obvious that these longer-term measures have to be accompanied with the short-term measures. In terms of the policy measures these are still early days. It will be difficult in our view to see turnaround in the policy direction for longer-term priorities but there is scope for policies to surprise to upside given how low expectations are.”
- “Measures announced won’t be able to turn around the structural issues in the economy. Will need to see if the improvement in the sentiment will be followed by policy actions in the coming days or months.”
NatWest Markets (Galvin Chia, emerging market strategist)
- “I definitely think there’s too much pessimism priced in, but I also think that the bar for markets to turn pessimism around is higher than what the Politburo was able to deliver.”
- Expectations by foreigners into the Politburo event have invariably remained high as they hoped for a big, commodity-led stimulus; the measures “looks basically like a restatement of the stream of policy easing measures that have been announced in recent weeks.”
–With assistance from Abhishek Vishnoi and Wenjin Lv.
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