WeekWatch -‘Widespread protests against China’s zero-COVID policy’ December 22
Many of us will have spent the weekend watching the World Cup with friends. Meanwhile, in China, the country’s zero-COVID policy has held much of its population under a form of lockdown.
Last week saw widespread protests against the policy, which resulted in some restrictions being lifted. These included, in some regions, being able to self-isolate at home, as opposed to in quarantine facilities. In Shanghai, PCR testing requirements to enter outdoor public venues or use public transport ended, as another example.
These lockdowns have weighed down the Asian giant’s equity markets over the past year and have also affected global markets due to China’s wider economic significance, and specifically its importance to global supply chains.
David Rees, Senior Emerging Markets Economist at Schroders, says he expects Chinese economic growth to pick up next year, with GDP growth increasing from 3% in 2022 to 5% in 2023. He says: “Infrastructure spending has been buoyant in 2022 and should underpin growth for a while longer as policy remains supportive.
“Meanwhile, housing indicators may have started to find a floor and could stage some recovery in 2023 from a very low base. And the service sector would clearly benefit from any loosening of COVID restrictions that may emerge during the course of the year. This would help to unleash the cyclical recovery that leading indicators have been suggesting for a while will get underway in earnest as we head into 2023.”
This renewed optimism around the Chinese market saw the Shanghai Composite rise 1.8% last week.
Outside of China and the World Cup, the usual pairing of inflation and interest rates continued to dominate proceedings.
In the US, equity markets continued to push higher last week, buoyed by comments from Federal Reserve Chairman Jerome Powell that the Central Bank could start slowing down the pace of interest rate hikes this month. Powell noted that policymakers are conscious of overtightening, which could force the Bank into a situation where it needs to start cutting rates if there were a major deterioration in the economic picture.
However, Mark Dowding, Chief Investment Officer at BlueBay, warned against getting too excited by these comments.
He notes: “Over the past couple of months, market participants have been seemingly determined to look for a more dovish Fed and this has led to a material easing in financial conditions. Yet a more sober assessment of Powell will reflect that the Fed Chair continues to expect a higher peak in rates than was the case at the time of the September Federal Open Market Committee (FOMC) meeting. The Fed has also consistently pushed back on the narrative that a period of monetary tightening would quickly be followed by a reversal into rate cuts. Consequently, it is possible that the rally in rates could have legs, but only if data in the next couple of weeks is very compliant.”
He added that the upcoming US labour market and inflation figures will be disproportionately important ahead of the FOMC meeting in the middle of December.
Moving to Europe, the MSCI ex UK index added 0.5%, helped by CPI inflation data which slowed for the first time in 17 months.
In the UK, there is some concern over house prices, after Nationwide revealed a 1.4% month-on-month fall in November. This followed the Office for Budget Responsibility suggesting house prices could fall by almost 10% over the next two years. It is worth noting that these falls are from a high point after two years of strong growth. According to Nationwide, between June 2020 and August 2022, house prices increased 26.5%.
Shilpa Pathak, a manager at TwentyFour Asset Management, said that while tough times are ahead, she does not expect another 2007-style housing crash. For one thing, greater regulation means lending criteria remain stricter than before – for example, affordability rules ought to reduce the levels of defaults compared to the last crash.
Shilpa added: “There is no doubt that borrowers today are coming under pressure and that’s going to continue for some time. Interest rates have gone up and are expected to rise further, so it is inevitable that there will be an increase in mortgage arrears. But the Bank of England is already commenting that inflation will ease next year and that interest rates may not need to rise as far as the market is predicting.”
TwentyFour, BlueBay and Schroders are fund managers for St. James’s Place.
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