Head of Equity Strategy
Summary: Last week was driven the narrative that China is about to significantly ease its strict zero Covid policy but interestingly enough our two Chinese theme baskets were not aligned in terms of conviction of how fast it can be achieved. Our China consumer & technology basket, which consists mostly of liquid technology and consumer stocks traded in Hong Kong, was up 4% while the China's little giants basket, which consists most of stocks traded on mainland exchanges, were down 1%. Another key development last week was Bullard's hawkish comments on policy rates slamming our bubble stocks basket down 9% last week.
The Chinese paradox
Last week was driven by two narratives and trades. China is reopening its economy loosening its strict zero Covid policy and Europe must increase its military strength after a loose missile struck ground in a small Polish town close to the border of Ukraine. As a result our China consumer & technology and defense baskets were the two best performing baskets up 4.4% and 2.3% respectively.
What is a bit striking is the divergence between our two Chinese baskets. The one tracking the large cap consumer and technology companies was up 4.4% and consists of many liquid stocks traded in Hong Kong and thus more easily accessible by foreign investors. The other basket tracks the little giants of China, which are mainly hardware technology companies listed on the mainland exchanges and thus are dominated by domestic flows, and was down 1% last week. Was last week a story about foreign investors buying the ‘Xi pivot’ on the country’s Covid policy and domestic investors less certain about the direction and speed?
In any case it is clear today that the path to leave the strict zero Covid policy will be a lot more bumpy. Shijiazhuang, a city of 11mn people around 300 kilometers from Beijing, has moved back into a restrictive policy mode forbidding residents in high risk areas to leave their homes. While China has a lot of incentive to opening up again to kickstart the economy the path is likely not to be smooth as investors have priced in over the past two weeks.
Bullard’s hawkish remarks slam bubble stocks
Last week’s performance among our theme baskets was also characterized by the 9% decline in our bubble stocks basket. This was due to Fed James Bullard’s comments that higher interest rates have had little impact on inflation and that the policy rate could be set at 5-5.25% before being within the ‘restrictive zone’ which is 125 basis points above the current policy rate. This more restrictive monetary policy outlook is negative for long duration assets such as bubble stocks that have negative earnings expectations over the next year and are priced at high equity valuations.
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
