Report Card

Photo by Ryoji Iwata on Unsplash

Figure 1: Stock Market Movement Scale Aug23

Earnings Scorecard

August activities were dominated by companies' reporting earnings. Indices reflected the relatively good scorecard of ASX 200’s Beat/Miss Ratio of 1.06 versus S&P 500’s at a better 4.96 (Chart 1). Activities at the stock level were masked by the small losses of the Indices with S&P/ASX200 Accumulation losing -0.73% (propped up by 0.69% of dividend) and S&P 500 down -1.77%.

Chart 1: Scorecard for ASX200 and S&P500; Source: LSEG I/B/E/S

In September, we are back to focusing on the interest rate rhetoric, with a new narrative of when interest rates may start to fall from their “peak”. A clearer picture is likely to emerge only after US’ next two decision points of Sep and Nov this year. The other two focus were timing of the US recession (which is pushed out again with lower probability), and China. It is probably the right juncture to discuss China as its implications for Aussie stocks is beyond that of global economic growth. It directly impacts Aussie commodity stocks and the AUD (which has been falling, ouch).

China’s Property Sector - are we stalling now?

Since the collapse of prices from the peak of Feb ‘21 (Chart 2), the overall price-recovery of Chinese properties since mid 2022 seems to have stalled, despite various property investment stimulus.

Chart 2: China Property Price; Source: CEIC Data

Second-hand property prices have continued to fall (Chart 3) and the sentiment towards the sector, does not seem to have recovered, in fact has continued to sour (Chart 4). A reading of below 95% in the Real Estate Climate Index indicates low prosperity. However, there is another story to be told, in the next chart.

Chart 3: China Residential Properties are deflating; Source: Winds, Macrobond

Chart 4: China Real Estate Climate Index; Source: CEIC Data

The Chinese Wealth Effect- not feeling it?

Chinese consumers may have been in both a de-leveraging and savings mode (Charts 5a and b) but do they feel wealthy? With lower valued properties and scenes at the Chinese home front - young adult kids and college graduated kids (fresh or otherwise) at home; not able to find work (Chart 6), and dipping into the bank of mum and dad. The tepid spending (Chart 7) may just be the reflection of these more overwhelming negative emotionality.

Charts 5a and b: Chinese households deleveraging and saving; Source: Wind, Macrobond

Chart 6: High Youth unemployment rate in China; Source: CEIC Data

China’s Iron DINK

It is well known now that China’s population is shrinking, birth rate is plunging, young couples are avoiding having kids and undesiring coupling. And then there is the new Iron DINK phenomenon* (Chinese females between ages of 18-31 not wanting to have children) further dampening housing investments and starts and the lack of spending impetus (Chart 7) on toys, milk, baby clothes etc. to spur the economy.

*Sources: :Asia Society, The Last Generation: Why China’s Youth Are Deciding Against Having Children

Chart 7: China Retail Sales

Chinese savers - the hidden dry powder?

The property sector has traditionally been the growth engine of the Chinese economy and had in fact been substituting the weaker external demand in the last few years (Chart 8). With the current trend and poor sentiment towards the property sector, they have surfaced the undercurrent lack of investments in the sector, by both the private sector and state-owned enterprises (Charts 9 and 10). For the tide to turn, a mobilised mountain of savings may be the force needed.

Chart 8: China Property Sector and External Demand; Source: Wind, Macrobond

Chart 9: China Monthly Housing Activity Data; Sources: Haver Analytics, Goldman Sachs Global Investment Research

Chart 10: Fixed Asset Investment; Sources: CEIC, FactSet, NBS, J.P. Morgans Asset Management

When Shall the Titanic Turn?

Is there systemic risk from the property sector fallout?

This is important to ascertain, as in the absence of a financial system, systemic risk lays the foundation for recovery.

It is observed that Chinese Banks' provisions for low-quality loans seem to be at a very high and healthy level of 200% (Chart 11) whilst the level of loans provided to residential mortgages are less than 17% of total loans. These give greater confidence of China's financial system health.

Chart 11: Banks’ provision of coverage (of low-quality loans) ratio; Sources: Wind, J.P. Morgan Asset Management, China Banking and Insurance Regulatory Commission

What about the lack of real estate activities and implications for banks?

Fortunately a lack of activity tends more of a crimping of profits rather than financial stress for Chinese banks. This is evident from households de-leveraging, re-negotiating for either or both lower rates and longer tenor.

Any Signs of Hope?

China's CPI and PPI are two indicators we are watching. As depicted in Chart 12, China's economy has been hampered by the falling of CPI (which is disinflationary detracting from growth) and PPI (lowered producer prices especially from manufacturing).

Chart 12: China’s CPI and PPI; Sources: Wind, Microbond

Signs we have observed in August 2023 data:

CPI - flicker of hope. The first uptick in inflation, (a sign of easing disinflation) was observed. China's CPI in August rose 0.1% from July's -0.3%.

Chart 13: China’s August CPI; Source: National Brureau of Statistics China

Construction PMI - a little sign of life with an uptick in construction business activity.

Chart 14: China’s Construction PMI; Source: National Bureau of Statistics of China

Services PMI - registered a slight fall but has remained in expansionary mode (of above 50).

Chart 15: China’s Service PMI; Source: National Bureau of Statistics of China

Manufacturing PMI - has remained weak (under 50). A return of demand push (from export order books), may be needed to see the continued uptrend to above 50 (growth).

Chart 16: China’s Manufacturing PMI; Source: National Bureau of Statistics of China

The other lever is China’s fiscal policies. The potential for the resumption of the Pledged Supplementary Lending (PSL) (at preferential rates) or a cut to banks’ Reserve Ratio (RRR) (Chart 17) by the government are all the potential injection of liquidity (and life) into its financial system (and vicariously into the property sector).**

**China announced a cut of 25bp to its RRR on 14 Sep 23

Chart 17: China’s current RRR; Source: CEIC Data

Well, markets had been disappointed with past stimulus before. Will it be different this time... Watch the titanic.