China’s economy continues to be supported by their manufacturing industry, while consumer spending remains tepid. Growth in retail sales continue to disappoint, and their recent Q2 Growth Domestic Product (“GDP”) reading saw a deceleration in growth, posting just 4.7% growth year-on-year. In the property sector, there are positive signs that the homebuying easing measures have supported property sales as secondary property sales in tier-one cities jumped double digits. While we are encouraged by this early data point, we need more evidence to be convinced given that we have observed a short-lived rise in home sales when homebuying restrictions was eased significantly in 2023. Additionally, we will also be monitoring the outcome of the Third Plenum to understand the broad policies shaping the Chinese economy going forward.
While we maintain our modest concerns over the medium-term outlook on the US economy, the deceleration in growth and unemployment trends have yet to catch the attention of investors due to strong AI-related investments. Over the longer-term, we are assured that fiscal dominance will be prevalent as the US’ Congressional Budget Office projects that debt-to-GDP levels will increase from around 120% today to 200% over the next 30 years. This frequently raises concerns on the sustainability of the US economy. Our take is that the current status quo could last much longer than anticipated. Moreover, aggressive attempts to time market peaks normally results in large opportunity costs. Hence, we will continue to invest in US firms while being cognizant of potential de-dollarization and debt risks over the long run.
Following the Fed's testimony on their readiness to lower interest rates and market expectations of a Donald Trump victory in the presidential election, there has been a sudden rotation into smaller capitalization stocks, which have underperformed the Standard & Poor’s 500 since COVID heavily affected these businesses. The market is likely anticipating a “no landing” scenario, as small businesses typically benefit more from lower borrowing costs and fiscal spending compared to larger firms. We remain wary of smaller firms that are significantly exposed to debt due to our concerns about slowing end-demand globally.
23 Jul 2024
23 Jul 2024
23 Jul 2024
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