1. Newsroom
  2. China market outlook amid policy easing
Menu
Analisi 22.05.2019

China market outlook amid policy easing

China market outlook amid policy easing

With growing uncertainty around the Sino-US trade war and that relationship at a low ebb, investors are increasingly focusing on policy response to assess market outlook.


Some observers favour China over the US in policy easing speed and breadth, thanks to the former’s highly centralised regime. Others argue that China’s hands are increasingly tied due to high leverage, worsening credit quality and private sector growth. We believe that Beijing can afford to stretch out policy easing in 2019 to overcome the downside shock.

But if the drag gets amplified and protracted beyond 2020 (for example, if manufacturing migration or capital flight becomes more severe than currently envisaged), the stimulus game will be a much tougher play for China. Beijing will need to make alternative strategic alliances to boost production and attract foreign capital to make up the losses.

Overall, we remain constructive on Chinese assets in the next 6-9 months.

Policy Assessment

A worst-case scenario of 25% tariff on all Chinese exports to US will cut about 1.4% of China’s GDP growth, including the multiplier effect. This means about RMB1.28trn or $190bn in potential economic loss needs to be offset.

This resembles the 2015-16 policy response cycles, although it will be far less severe than the global financial crisis in 2008-09. That meltdown required a massive policy stimulus which China simply can’t afford today.

Compared to the last three policy easing cycles of 2008-09, 2011-12, and 2015-16, China’s current easing remains at a relatively early stage. Growth support will take priority over leverage concerns when fighting a trade war. We expect Beijing will ramp up policy impulse (which measures the extent of stimulus) to levels similar during 2015-16.

To pump $190bn back to the economy, our simulation suggests that China’s fiscal deficit will expand to around 6% of gross domestic product (GDP) on a four-quarter rolling sum basis. 

With an additional 100-150 basis points (bps) reduction in banks’ reserve requirement ratio (RRR), credit impulse may resume to a 10%-15% growth rate from the current low single-digit level and add about 7% of GDP new debt stock to the already high level over 12-month horizon.

Market Assessment

Historically, China’s policy easing tended to result in earnings recovery and price/earnings (P/E) multiples expansion in both A- and H-shares equity markets, as well as spread compression in China’s US dollar (USD) high-yield (HY) and investment grade (IG) credits.

If 2015-16 is a reasonably good yardstick to judge the current market outlook, both Chinese equities (P/E and earnings recovery) and USD credits (spread compression) are roughly half-way through their respective recovery cycles.

As stated before, Chinese equity valuation is not too stretched relative to its history and to the global index.

While China’s credit spreads have tightened markedly since early 2019 and have stayed tight, HY spread has widened by a mere 8bps since Trump’s new tariff imposition on May 10. IG spread has gapped up only 2bps while the upside cap remains significant from risk/reward perspective.

However, the credit market will be underpinned by monetary easing and delayed deleveraging and credit default risk. HY credits will get additional support from extended policy accommodation in the housing market as policy easing persists.

Read the Full Document with Charts

CHAN-Anthony_150x150.jpg

Anthony Chan
Chief Asia Investment Strategist

Analisi

Gestione discrezionale – le redini sono in mano vostra

Ogni cliente ha aspirazioni e obiettivi unici, così come è unico il nostro approccio alla gestione di portafoglio discrezionale.

Leggete di più
Expertise

Swiss & Global Equities

Why Swiss equities now? This market offers equity investors the stability and agility they need to navigate this volatile period. 

Read more
Expertise

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

Read more

Le news più lette

Analisi 10.02.2021

COVID-19: UBP vi terrà aggiornati

Dalla comparsa del coronavirus, UBP accompagna e sostiene i suoi clienti nel contesto inedito di questa crisi sanitaria mondiale. La Banca vi aggiorna regolarmente sull’adeguamento dei suoi piani alle regole precauzionali fissate dalle autorità e condivide con voi le più aggiornate analisi dei suoi esperti sulle conseguenze della pandemia per l’economia mondiale e i mercati finanziari.

Analisi 24.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.

Analisi 17.12.2020

UBP Investment Outlook 2021

Il mondo nuovo

Altro da leggere

Analisi 25.02.2021

UBP’s small- and mid-cap capabilities

SMID-cap equities are poised to mean revert and outperform over the next three to five years. The best time to allocate to SMID caps is when earnings are “depressed”, i.e. now.

Analisi 24.02.2021

The return of leisure & entertainment

The pandemic has not only caused economic chaos around the world, but it has also had a deep impact on people’s lifestyles.

Analisi 19.02.2021

Global Recovery: Vaccine- & Stimulus-led

A clear light at the end of the coronavirus tunnel is now visible with the start of vaccination campaigns.