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WeekWatch – ‘Chinese stock markets briefly rose above their all-time high’ February 2021

WeekWatch – ‘Chinese stock markets briefly rose above their all-time high’ February 2021

Last week, Chinese stock markets briefly rose above their all-time high. Fresh from the Lunar New Year break, investors pushed the CSI 300 Index of Chinese stocks to levels not seen since 2007 – although it later settled below that point.

China’s economy has been going from strength to strength ever since the epidemic was brought under control last year, notes Martin Hennecke, Asia Investment Director at St. James’s Place.

“While a key driver of the initial rebound was the strong exports, local consumption has been catching up lately, too, with shopping malls well attended and cinemas packed. China’s box office for the 2021 Spring Festival reached over 7 billion yuan – a new record, which has provided investors with confidence as well,” he said.

“That said, I would also highlight that, with valuations having increased in the process, particularly in the more popular sectors – healthcare, technology, and electric vehicles – investors may need to become more selective on stock picks at this point.”

Japanese stocks also recorded a strong week (see In the Picture below), when the country’s flagship Nikkei 225 index of companies reached a level that it last hit in 1990. Market commentators believe that the recent resurgence in Japanese stock prices is partly to do with the broader optimism in equity markets, as well as positives signs about its economic recovery.

Wall Street slowed down last week, breaking a recent run of gains that has seen major US stock indices reach new highs earlier this year.

The pause appeared to be partly to do with fears that Joe Biden’s $1.9 trillion stimulus package might lead to higher inflation. The president promised last week that the economy would come “roaring back” after Congress approves the package.

Central banks like the US Federal Reserve, or the Bank of England, tend to increase interest rates when inflation rises too high. Higher interest rates lead to higher borrowing costs for people and businesses, which in the long run can lower stock prices.

However, it seems unlikely that central banks will tighten policy any time soon. Markets are currently pricing in a first hike in US interest rates in the middle of 2023, noted Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund.

Last week, sterling rose to $1.40 against the US dollar for the first time since 2018. The pound has had a strong start to the year, partly due to the post-Brexit trade deal signed late last year, but also due to the success of the vaccine rollout programme in the UK.

Many large companies in the UK derive much of their income from abroad, which means that they often stand to benefit from a weaker pound. For investors in UK equities, the pound’s value is less important than the underlying health of these companies, as well as their future prospects.

Although currency traders seem optimistic about the UK’s immediate future, it’s clear that the road to recovery will be a long one. Official numbers showed on Friday that UK manufacturing slumped last year, and that the latest national lockdown hurt retailers in January.

However, following pressure from industry groups demanding a ‘road map’ out of lockdown in the UK, over the weekend it emerged that the prime minister is set to reveal a four-part plan to lift the restrictions. Early signs are that schools will reopen in early March, and outdoor gatherings and sports will be allowed again towards the end of March.

Finally, the key actors in the GameStop saga were hauled in front of the US Congress last week.

Lawmakers were seeking to understand why Robinhood, a popular stock-trading platform, halted the trade of GameStop after its price rocketed skyward following online discussions about it. They also wanted to understand the phenomenon of amateur investing, by exploring any dangers about the ‘gamification’ of trading, or whether online discussions about stock prices could be considered market manipulation.

The episode has highlighted the growing influence of amateur investors on the stock market. The issue reverberated around the wider market when it peaked late last month and caused an increase in volatility.

Last week’s hearing was also striking for bringing together two quite different groups: politicians on one side, and online forum users on the other. In his testimony, a popular YouTuber who goes by the persona ‘Roaring Kitty’, whose video analysis of GameStop helped spark the phenomenon, said to Congress “I am not a cat” – a clarification that has probably not been needed before in the chambers of Capitol Hill.

BlueBay is a fund manager for St. James’s Place.

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