Julius Baer: comentarios especiales sobre China

Redacción - Martes, 28 de Julio

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China’s disappointing recent data and its stock market fall highlight that the world’s second-largest economy is strug-gling to hold up its growth momentum.  China’s lower demand for commodities is increasing deflationary pressure and the haunting ghosts of deflation let the alarm bells ring in many central banks.

What is wrong with China − the economy many envied for its corporate-style-like economic policies? Based on a sound plan China is undergoing a transformation away from heavy industry and manufacturing-based aggressive exports to a more inward-looking high-tech and consumer-based economy. A liberalised financial sector seemed in many aspects to follow the United States as a role model.

With this transition it was always clear, that China’s growth momentum would trend lower in the coming years and be on healthier footing. But the latest weak economic readings show that China, the major global growth locomotive of the last years and largest importer of commodities, is coughing now. The preliminary Caixin manufacturing purchasing man-agers’ index reported 48.2 for July and industrial profits fell by 0.7% in the first half of 2015. These are data reported just twelve days after an annual Q2 growth rate of 7%, of which roughly 30% have been contributed by financial sector. How can we be astonished about Chinese stock market crash, the biggest one-day loss in eight years? How can we otherwise explain the erosion of commodity prices across the world, hitting so many suppliers and pushing down inflation levels to an extent that the haunting ghosts of deflation are back again in many places?

As a consequence, central banks of commodity providers like Norway, New Zealand or Canada have lately been cutting rates to foster growth, while others such as Sweden are still cutting rates to contain deflation risks. The European Central Bank stubbornly sticks to lavish asset purchases, hoping the domestic recovery will save the day. Central bankers cannot enjoy this summer. The People’s Bank of China now has to realise its policy error, namely that its recent monetary stimulus came too late and was so far too cautious. On the other side of the Pacific, the latest developments should put the US Federal Reserve on its toes, not to hike rates too soon.

Janwillem Acket, Chief Economist, Julius Baer

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ECONOMICS II: Chinese growth and reforms

Reforms and deleveraging in the Chinese financial sector have led to a slowdown in economic growth over the past year, also affecting the property sector. Fiscal and monetary policies were eased somewhat to stabilise economic conditions, but more is likely to follow in order to keep economic growth stable at below 7%- levels. Thus, Chinese economic growth will slow further in 2015 and 2016 as it will take years until reforms are implemented and start to result in positive effects.

 

Structural reform momentum remains high, particularly in the areas of financial liberalisation, financial regulation, consolidation of state-owned enterprises and bringing local government debt under control.

Susan Joho, Economist, Julius Baer

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EQUITY: Emerging Asia - Equities fighting for stability

•       Watch two key developments in China: first, regular market price detection has to be restored and second, recent economic measures have to become visible in everybody’s data.

•       Emerging Asia faced a serious setback, but do not underestimate the authorities’ financial and monetary means to fight their way back to stability. It is in their highest interest.

 

Among the three global emerging regions, emerging Asia was the guarantor for stability combined with an attractive risk/return ratio. Our overweight ratings on China, India*, Taiwan and our frontier market Vietnam* reflect our commitment to emerging Asia. Since the Chinese market peaked a few weeks ago, the in-vestment community has been asking whether the investment case for emerging Asia is still intact. As usual during turbulent times, the answer is not straightforward. For a regional market assessment China is without doubt key. In this sense the authorities have to fight their way back to stability and credibility for which we identify two vital developments.

 

First, China needs to get rid of all market interventions, be it trading halts, forcing buyers into the equity market and other regulations that distort regular market price detection. As long as regular market price detection is not restored, local and foreign investors are likely to stay on the sidelines. The second key devel-opment is the time span needed for the authorities’ recent measures to support economic growth to become visible in eve-rybody’s data. The Q2 earnings season in emerging Asia has started. That said, for Q2 we expect another soft quarter and believe that the Q3 earnings season will be more meaningful to see whether the economic measures have taken effect. Besides we continue to closely monitor consumer and business confidence levels to evaluate the potential impact on the real econo-my. Despite the current uncertainties one should not forget that, first the authorities have the financial and monetary means to prolong the economic cycle and, second, demand from the US, Europe and Japan is stable.

 

Despite the current uncertainties emerging Asia remains our favourite emerging region. What markets need is more time to evaluate and digest incoming data.

 

Heinz Ruettimann, Strategy Research Analyst Emerging Markets, Julius Baer

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FIXED INCOME: Flight to safety

 

• Money is flowing out of risker bond segments amid signs of weakness of global growth and speculation about deflation.

• Speculative grade issuers are hit by weakness of commodity prices. We recommend staying in USD dollar high grade bonds.

 

Money is flowing out of riskier segments of the bond market into government and top-quality bonds amid signs of weakness of global growth, falling commodity prices and renewed speculation on deflation. Private investors have reduced their exposure to emerging market bonds for eight weeks in a row, but also sold USD 5 billion of USD high-yield bond funds.

 

The weakening of the global economy is the major factor behind this move. Incoming data for the Chinese economy is disappointing, with the purchasing managers’ index for the manufacturing industry unexpectedly falling to a 15-month low. Neither the US nor the eurozone economy can compensate for the loss of momentum of the Chinese economy. Commodity prices thus remain under pressure, intensifying fears of a global deflation.

 

The collapse of commodity prices not only lowers the growth outlook for commodity exporters and weighs on consumer prices in mature markets, but it also undercuts the credit quality of mining and energy stocks globally. Indeed, bond prices of heavily-indebted oil and mining companies are under massive selling pressure, as investors want to reduce their exposure to companies with a meaningful risk to default. The average yield of the Merrill Lynch index for speculative-grade bonds of mining and metals companies rose to 13.1% on Friday from 12.4% a week ago and 6.5% in early September last year. During the same period, the average yield of energy bonds has risen to 10.7% from 5.3%.

 

We expect the combination of flight to safety and problems of the mining and exploration bonds to continue, but also inflation expectations to remain muted for the time being as deflation fear is bigger than inflation worries. We had been recommending USD high-grade bonds in anticipation of some problems in the high-yield market, and we are sticking to this defensive strategy for the time being.

 

Blame game in East Asia undermines investor confidence

The Chinese domestic equity market has shed some gains in today’s trading again, with the Shanghai Composite and the Shenzhen Composite down close to 2% at the time of the writing, respectively. Both indices are still up a stunning 13% and 50% year-to-date even after the recent correction. Investors are frustrated, however, about the lack of coordination among Chinese authorities to support the market. Rumours are circulating that the Chinese central bank refuses to cut interest rates in support of the equity market and has even withdrawn funds from the Chinese Securities Finance Corporation (CSFC), the special entity that was sup-posed to support the market in recent weeks.

 

Readers will recall that the International Monetary Fund urged the Chinese authorities last week to allow market forces to set the level of the equity market, and to curtail its interventions. While it is true that the Peoples Bank of China has not cut interest rates yet, it seems unlikely that there is a lack of funding for the CSFC. In fact, China’s Securities Regulatory Commission this morning stated that is will continue its efforts to stabilise the market. The lack of coordination among the different monetary and regulatory bodies in China, however, continues to undermine market confidence.

 

The problems of the Chinese domestic market could be supportive for the Hong Kong market in the medium term as investors will appraise its lower volatility, lower valuation and better liquidity.

Markus Allenspach, Head Fixed Income Research, Julius Baer

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COMMODITIES: China concerns pressure oil prices

The selling pressure on oil prices remains high as there is no shortage of bearish news in the market. The sell-off in equities and concerns about the Chinese economy, the surprising up-tick in US shale drilling activity, the reduction in Iranian floating storage and record Iraqi exports have all been factors weighing on oil prices as of late. However, sentiment is down to exceptionally bearish levels and most of the negative trends seem well anticipated in prices. The build-up of short positions by nervous hedge fund money in recent weeks added to the selling momentum in oil and across commodities in general. The short-positions are even exceeding the levels of the US oil price lows in March. The risks of a short-covering bounce loom large. Our position in oil producers suffered from the slide in oil prices but we refrain from exiting the trade for the time being. The slowdown in US shale oil output, robust global demand and the short-covering risks provide the basis for a short-term rebound in oil prices, unless China is facing a severe economic slowdown. Moreover, the ongoing earnings season should reveal support to producers’ cash flows from declining costs.

 

Oversupply concerns continue to burden oil prices and feed bearish momentum. We maintain our neutral view but see prices climbing back above USD 60 per barrel due to declining shale production, strong demand and short-covering.

Norbert Ruecker, Head Commodities Research, Julius Baer

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