A dramatic surge in the value of the world’s most out-of-favour major stock market last week showed both how difficult but also how potentially rewarding a contrarian investment approach can be.
China: what crisis?
The announcement of a big fiscal boost, including money specifically targeted at China’s struggling stock market, helped shares in Shanghai, Shenzhen and Hong Kong enjoy their best week of gains since the financial crisis.
The CSI 300 index rose by nearly 16% last week, and Hong Kong’s Hang Seng was up by 13%, as investors warmed to a combined monetary and fiscal bazooka from the authorities in Beijing. The latest stimulus package includes US$114bn to encourage companies to buy back their own shares and to provide funds for insurance companies to buy local equities.
That galvanized what has been the world’s most unpopular stock market which has traded on a single digit multiple of expected earnings as investors have fretted about adverse regulatory policies, an ongoing property slump and a tepid emergence from Covid lockdowns.
The big question now is whether the rally in Chinese shares has legs. Sceptics say it will need a follow through improvement in corporate earnings to be sustainable. But history suggests it could have further to go. Between 2014 and 2015, the volatile Chinese market rose by 150% before falling back again.
The China rally quickly spilled over into other assumed beneficiaries. European shares - boosted by car makers and luxury goods companies that export to China - hit a new high last week. Commodities, too, bounced back from recent weakness in anticipation of higher Chinese demand.
US rally continues
Meanwhile in the world’s most important stock market, the S&P 500 index continued to hit new record levels last week as investors basked in the warmth of the previous week’s unexpected half percentage point cut in US interest rates.
Attention is now focused on the next scheduled rate-setting meeting, which comes shortly after the Presidential election, which remains too close to call. With the US economy enjoying a Goldilocks scenario of only modestly rising unemployment and close-to-target inflation, the US Federal Reserve is thought to have some way to go before its interest rate policy hits a neutral rate at which it is neither stimulating nor restricting economic activity.
All change in Japan
Back in Asia, markets were volatile again after an unexpected victory in last week’s leadership election within the ruling Liberal Democratic Party. Shigeru Ishibu immediately called a snap election to earn a public mandate for his leadership after unexpectedly pipping favourite Sanae Takaichi to the top job.
The Nikkei 225 index fell as much as 4.8% on Monday on the election result, with echoes of the 12% tumble in Japanese shares in early August.
Takaichi was the market’s preferred candidate, as she was seen as a politician in the image of former reformer Shinzo Abe. She advocated market-friendly measures such as continued ultra-loose interest rate policy. By contrast, Ishibu is expected to push for higher corporate taxes and to support the Bank of Japan’s recent tightening of monetary policy.
And finally, the UK
Here, attention is now increasingly focused on the Budget in a month’s time. Speculation is mounting about potential tax rises with wealthy investors and higher earners in the new Chancellor Rachel Reeves’ sights. Changes to capital gains tax, inheritance and pension contributions are all in the frame.
Meanwhile, as the Bank of England looks less likely to cut interest rates than its peers in the US and Eurozone, the pound is pushing higher against both the dollar and the euro. It now trades at more than US$1.34. In the fixed income market, there is upward pressure on yields, as investors worry that the new government’s spending plans could involve a change in the fiscal rules that limit government debts. So far, bond investors have given the government the benefit of the doubt but that may be tested on 30th October.
