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China's Stimulus Moves Bode Well For Stocks - CIO Comment

Tom Burroughes, Group Editor , 23 April 2019

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Chinese equities took a bath last year but stimulus efforts by the country are only starting to feed through into markets, which suggests more gains are on the way, a senior investment figure says.

Chinese equities have rebounded from their poor performance in 2018 but there’s plenty of upside left, with emerging markets in general looking as if they can put strong numbers on the board in coming months, a senior wealth management investment figure says. 

The comments come from Gary Dugan, who has worked at institutions such as Barclays, JP Morgan, and Merrill Lynch. Dugan is now CEO of Purple Asset Management in Singapore. Signed from the “Global Chief Investment Office”, Dugan's name in the note accompanies that of former UBS and Merrill Lynch senior investment figure Bill O’Neill, who is now an independent consultant.

Mainland Chinese stocks fell alongside equities in many other nations last year. The MSCI China Index of equities fell by 18.9 per cent last year. Emerging markets were hit by concerns that higher US interest rates will inflate their borrowing costs because many such nations owe debt denominated in dollars. There are also worries that US President Donald Trump’s raising of tariffs against China will blunt global trade and growth. 

China's government intends to cut taxes and fees totalling RMB2 trillion (around $298 billion) this year, about twice as much fiscal stimulus than was originally planned.

Dugan is generally sanguine on the investment outlook.

“We suspect there could still be further upside for Chinese equities despite the remarkable rebounded from its bout of market weakness last year. The economic benefits of the government stimulus are only just starting to be seen in the data,” they wrote in a note.  

“As we go further into the calendar year, we expect companies to express more confidence for the outlook which in turn should lead to upgrades to corporate profits forecasts. The market trades on a forward P/E multiple of 12.4 times [earnings],” they continued.

“We would reiterate our positive view of emerging markets where the accommodative Federal Reserve and the dollar’s strength topping out against other major currencies are all helpful factors. The general asset class should also be helped by increasing confidence that Narendra Modi will hold on to power after the Indian general election,” they wrote.

Dugan said he had recently visited China and his impression is that Chinese economic progress is considerable.

“There is a good deal of confidence in China that the long term is set fair and that the economy is back on track after last year’s wobbles. The Chinese see the consolidation of power by President Xi, last year, as setting the scene for policy consistency well into the future. Many of the local economists were convinced that the policy shifts made in the latter stages of 2018 were enough to generate a good pickup in growth through 2019. The Chinese authorities have shown the ability to take decisions swiftly to manage slowdowns, however, they also recognise that the actions can sometimes leave imbalances in the economy that create problems in the future. More attention is being given to ensuring that future swift policy shifts do not leave a legacy of inflating asset prices (real estate) or unproductive capital investment,” Dugan wrote.

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