China – new year, same challenges.
The COVID-19 pandemic already feels like a distant memory for many of us here in Switzerland, but in China, the restrictions weren’t fully lifted until the end of 2022. So last week we saw the first truly normal Chinese New Year celebrations in four years – that shows just how far China is lagging behind other economies when it comes to returning to normal.
The tourism and consumer data for this eight-day holiday were upbeat overall. Tourism rebounded by 34% year on year, hitting 119% of pre-pandemic levels. Per capita spending, however, was down 9% on 2019 due to the ongoing problems in the property sector and still-sluggish consumer confidence, a sign that we haven’t yet seen the long-awaited recovery in the services sector.
Although Hong Kong's Hang Seng Index gained more than 3.7% last week, it’s still down 5% since the start of the year, underperforming other markets in the region. In their recent announcements, the Chinese authorities seem to recognise the need for urgent intervention. But it’s hard to tell whether these are just empty promises or whether Beijing will actually deliver. What we’re now seeing in China is basically a crisis of confidence. While this may not be a systemic risk, it’s nevertheless putting the brakes on China’s recovery. There won’t be a lasting uptick in the country’s economic expansion until its property sector stabilises. Confidence has deteriorated among both consumers and investors. To restore it, the Chinese government will have no choice but to step up its stimulus. The announcements made since last summer are certainly encouraging, but now it’s time for policymakers to adopt a more decisive tone and take concrete steps with tangible results.
Beijing will suffer a lasting dent in its credibility unless sentiment improves in the coming months. In our view, we’ll find out in the next few months whether the stimulus measures introduced since last summer have helped to spur economic output. If the measures prove to be ineffective, more time will be needed before investors regain confidence.
Only after Beijing proves that it’s serious about kick-starting the country’s economy will confidence be restored and Chinese share prices pick back up again. For now, the market climate is particularly grim and valuations are historically low – whether it’s the Year of the Dragon or the Year of the Rabbit won’t make the slightest bit of difference.
Climate still buoyant for hedge funds
We think the global climate is still buoyant for hedge funds and active investment strategies. Last year, financial assets became much more sensitive to microeconomic factors. Macroeconomics had taken centre stage after the pandemic and the subsequent recovery, but investors have now started to show renewed interest in companies’ fundamentals, and that is reflected in the uptrend in share prices. This change in approach is very good news for active investment strategies, since it will enable portfolio managers to reap the benefits of their analyses. They are now well positioned to tap into this continuing trend, with total exposure at a five-year high. In addition, alternative funds tend to do well when short-term rates are high – they can generate twice as much alpha when these rates are at 5% compared with 0%.
This week's figure : -0,8%
The month-on-month decline in US retail sales was sharper than expected in January. This indicator can be volatile, but it does look like the savings built up during the pandemic are now running low.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
