WeeklyWatch – Championing change for China

1st October 2024

Stock Take

Drastic change for China

On average, China’s economy has grown at an average rate of 9% a year since the late 1970s, when it opened up and reformed.

But this year was a different story. China has been facing a number of challenges, including strong disinflationary pressures, a severe property downturn and flaky consumer confidence. The country had set its annual growth target of around 5%, and with all the above issues, it’s at a huge risk of missing the mark. At the start of the week, the markets had an enthusiastic response to the People’s Bank of China’s planned large-scale package of aggressive measures designed to help stimulate the economy.

As part of these measures are plans to cut the amount of cash held in reserves by the banks, which is hoped to free up approximately one trillion yuan ($142 billion), which will go towards new lending. It’s also hoped that this will help boost the struggling property market by cutting borrowing costs for existing mortgages and lowering the minimum down payments on all homes to 15%.

Is this the best approach?

On Tuesday, global stocks reached a record high and major US indices hit record closing highs, which came as great encouragement to investors.

However, analysts believe that a lack of liquidity isn’t the biggest issue facing Chinese economic struggles. Instead, they believe that the way to boost demand is to design policies that put money into consumer’s pockets. As the week went on, the markets lost more momentum – giving rise to these doubts once again – but rallied on Thursday when Chinese leaders promised to deploy “necessary fiscal spending” in order to meet the country’s growth target and boost confidence and expectations for more stimulus. Leading indices in the US and Europe recorded all-time closing highs, Asian stocks finished the week at two-and-a-half-year highs and Chinese shares had their best week since 2008 when they jumped by nearly 16%.

The Head of Asia Investment Advisory at St. James’s Place, Martin Hennecke, highlights:

“Even at the lower end of estimates, China’s GDP is still forecast to grow at 4.6% this year, so it’s hardly falling off a cliff. The Fed’s action has made it easier for China to take these steps, and with its leadership in advanced manufacturing, green energy and transport, the fundamentals remain in place. These factors, combined with low valuations in both absolute and relative terms, continue to make a strong case for Chinese equities within a well-diversified portfolio.”

Piqued interest in the US

Concern surrounding the state of the US job market was pinpointed as the main culprit for the surprising decline in the US consumer confidence across the month of September – its biggest fall in over three years. The data also revealed that consumer’s 12-month inflation expectations increased in August. Despite analysts being hesitant to read too much into short-term data, the dip in consumer confidence supports the case for another big interest rate cut at the Federal Reserve when they next meet in November.

The end of the week put a dampener on these hopes. US weekly jobless claims declined to a four-month low, suggesting that the labour market remains fairly healthy. The second quarter corporate profits were also revised upwards, a growth which is hoped to help underpin business investment and the labour market.

Predictions for a smaller quarter-point cut were enhanced on Friday when it was revealed that US consumer spending increased in August. It was still less than expected but the personal consumption expenditures index (the Fed’s preferred inflation gauge) revealed its smallest year-on-year gain since February 2021.

A struggling EU

When it comes to the EU, there’s a strong interest for the European Central Bank (ECB) to issue further interest rate cuts. These expectations increased as a result of lacklustre business activity data. In September, the eurozone’s dominant services industry flatlined and manufacturing activity continued to fall.

Contractions, falls and recession

Germany’s slowdown deepened and France contracted again following its August boost – eurozone positivity seemed to be extinguished at the same time as the Olympic flame.

Germany’s second-quarter contraction and the sharp fall in business activity have increased the risk of Europe’s largest economy entering into a recession during the third quarter. German businesses are dismissing staff at a rate that hasn’t been seen in over 15 years outside of the pandemic.

Across the continent, in Sweden and Switzerland, inflationary pressures continued to ease, meaning that they cut their borrowing costs by a quarter point.

As a result of the deteriorating economic outlook across the continent, the bets on more ECB rate cuts in October have been boosted.

Are things looking up for the UK?

The UK government received some welcome good news this week as the Organisation for Economic Co-operation and Development (OECD) upgraded its estimate of UK economic growth for this year and 2025. The UK economy is expected to grow by 1.1% in 2024, a big increase from its initial forecast in May of 0.4%, placing them as the joint-second highest rate among the wealthy G7 countries. However, the Office for Budget Responsibility has marked UK GDP growth down from 0.6% to 0.5% between April and June.

Wealth Check

Autumn Budget awareness

Keir Starmer’s UK Labour government is due to announce its first Budget on 30th October, and there is widespread speculation as to what will be revealed. How the changes will apply to everyone will take time to be fully understood, and unless there are significant information leaks by the end of the month, we simply won’t know the details until the day.

Labour’s financial direction

That said, it’s a good idea to understand Labour’s initial financial initiatives. Prior to the election, they pledged the following financial plans:

  • Changing the taxation of non-domiciles, although without certain rules
  • Charging VAT and business rates on private schools
  • Increasing stamp duty on residential property purchases by non-UK residents

In addition, they have ruled out:

  • Increasing tax for “working people”, i.e. headline rates of Income Tax, National Insurance Contributions and VAT
  • Increasing corporation tax above 25%

On 27th August, Keir Starmer consistently referred to a “black hole” in the country’s finances, strongly implying that things need to get worse before they improve. Furthermore, Starmer mentioned that the largest burden would be borne by those with the broadest shoulders.

Which areas need clarification?

The knowledge that we have is based on the information presented in the Labour manifesto. The party has been quiet regarding wealth taxes, including Capital Gains Tax (CGT), Inheritance Tax (IHT) and investment taxes. As a result, many suspect that more clarity on the following areas will be announced in the upcoming budget:

  • IHT relief changes
  • Higher tax on capital gains and changes to CGT exemption
  • Higher taxes on investment income
  • Pensions tax relief changes (although Rachel Reeves has stated that there is no plan to curb tax relief)
  • Pensions tax-free allowance changes
  • Business Assets Disposal Relief changes

This speculation has arisen from the acknowledgement that tax increases may be required to meet Labour’s promise to tackle the fiscal challenges.

Regular financial reviewing is the way forward

Financial uncertainty and speculation can be unsettling, but it’s key to remember that any changes to your aspirations, personal circumstances and legislation are constant. Because of this, it is extremely important to regularly review your finances with a financial adviser. This ensures that they are made aware of your targets and can help you remain on track to meet these objectives and get the most out of any tax allowances that are available to you.

The value of an investment with St James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

In The Picture

The Chinese market has faced much hardship over the last few months, and news of last week’s stimulus reveals a much-needed boost.

The Last Word

“I am a mountain climber, but the bag that I have been given is not light.”

– Herbert Kickl, Austrian far-right leader of the Freedom Party, hailing last week’s election where his party won 29% of the vote, more than any other political group.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2024; all rights reserved.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

 

SJP approved 30/09/2024