Three things we’re thinking about today
- China National Congress. The week-long National Congress of the Chinese Communist Party (Congress) begins on October 16. This gathering takes place every five years and is expected to re-appoint Xi Jinping as the president for a new term of five years. The Congress will also appoint a new premier, as Li Keqiang is stepping down. Two new members of the Politburo Standing Committee of the Chinese Communist Party are also likely to be nominated. From an investor’s perspective, attention will focus on policy measures after the Congress concludes. It is believed that more substantial policies to stimulate growth have been held back until Xi Jinping is reappointed. While investors will likely welcome more aggressive policy easing, it is taking place against a backdrop of slowing global growth, weak domestic consumption due to China’s zero-COVID policies and US lawmakers’ hawkish stance toward access to key technologies that China needs to accelerate growth. While China still has policy levers to pull, the global backdrop could dilute their impact.
- Brazil elections. The first round of elections produced no single candidate with more than 50% of the vote, which means the two candidates with the highest share of the vote will progress to a second round on October 30. Jair Bolsonaro, the incumbent president, will face his rival Luiz Inacio Lula da Silva in the runoff. The coming weeks are likely to see the two candidates seek the endorsement of the six eliminated candidates, accounting for 8% of votes cast in the first round. Investors should look through the elections and focus on market-friendly developments in the coming 12 months. The potential for interest rate cuts in 2023 stands out given the central bank hiked interest rates ahead of most other central banks globally, and inflation may have recently peaked. If inflation continues to trend down, there is room for a less restrictive monetary policy, with a positive impact on the Brazilian stock market.
- Oil prices. Oil prices have been steadily declining since their peak on March 8 following Russia’s invasion of Ukraine. Relative to the US$68.1 average price of West Texas Intermediate (WTI) crude oil in 2021, prices have averaged US$98.1 year-to-date, an increase of 31%.1 Tight refinery capacity and a post-pandemic recovery in demand has pushed the price of refined products, including petrol, diesel and kerosene even higher, with a commensurate impact on inflation. Looking ahead, the decision by the Organization of Petroleum Exporting Countries (OPEC) to cut output, may support prices in the short term. However, with a global recession looking increasingly likely in 2023, it is difficult to see oil prices remaining elevated for a prolonged period. This has positive implications for inflation, although we note other drivers such as elevated food prices are more important for emerging market (EM) inflation.
As inflation has spiked higher, central banks have been accused of being asleep at the wheel. While the shift from easier polices during the pandemic to tighter polices in a supply chainconstrained world may have taken place slower than required, there is no doubt that central banks have fully reasserted their inflation fighting credentials. The US Federal Reserve has raised rates five times this year, by a cumulative 325 basis points,2 with more rate rises expected. Inflation in the euro area rose to a record 10% in September, which is likely to lead the European Central Bank to further increase interest rates. There have been fewer interest rate hikes in EMs than developed markets (DMs), reflecting more subdued inflationary pressures, helped in part by energy price subsidies.
Using real interest rates as a proxy for the monetary policy stance, markets such as Brazil are experiencing tight monetary policy, whereas policy in the United States and euro area remain loose. This has implications for the timing of eventual rate cuts, with Brazil likely to join China in cutting rates in 2023. In isolation, this is would be positive for investors. However, we acknowledge the challenging global backdrop and the need to see an improvement in global growth and/or a weaker US dollar to enable the positive impact of lower interest rates to filter through to asset markets in these countries.
The Chinese property market continues to struggle, which has impacted domestic growth as well as demand for key commodities involved in construction, including cement and steel. According to the World Cement Association,3 global cement output fell by 8% in the first half of 2022, led by a 15% drop in China. A 40% decline in new real estate construction starts4 as well as single-digit growth in infrastructure investment have contributed to the weakness in cement demand and, in turn, output. While the Chinese government has encouraged regional leaders to boost investment, its zero-COVID policy is viewed as the priority. To tackle this policy conundrum and noting the importance of real estate to the economy, the government has recently released three policies to stimulate the sector:
- Removal of the floor on mortgage rates for first time borrowers.
- Income tax refund if new property purchase takes place within one year of a prior sale.
- Interest on Housing Provident Fund loans decreased by 0.15% to 3.1%. 5
These polices are viewed as positive, but not transformative. Concern over the financial health of property developers, slower wage growth and double-digit youth (aged 16-24) unemployment is weighing on property demand. Two of the three measures lower interest rates, but the cost of financing is not the primary issue, it is confidence that matters. Once the China National Congress concludes and there is clarity over roles for regional leaders, more aggressive policy measures may be forthcoming to boost confidence. Slower global growth, a strong US dollar, global supply chain woes as well as domestic economic factors have created headwinds for EMs. Nevertheless, we believe in their long-term growth potential, as economic growth in EMs has continued to outpace that in DMs. EMs are home to companies with exposure to new technologies driving future sustainable economic growth. From solar and electric vehicle battery producers to semiconductor designers and manufacturers, the acceleration of innovation in EM is driving our confidence in the asset class. Despite the current challenges, we continue to see opportunities to invest in companies with a technological edge which are investing to drive growth.
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1. Source: Bloomberg, January 1 – October 3, 2022.
2. One basis point is 1/100th of a percentage point.
3. Source: World Cement Association.
4. Source: National Bureau of Statistics of China.
5. Source: Bloomberg.