While investors are debating the possibility of a soft landing in the United States following signs of post-Covid overheating and a series of interest rate hikes, the situation in China presents a stark contrast. The Chinese economy has missed an entire economic cycle and continues to struggle to regain momentum after the late lifting of lockdowns in 2022, leaving many sectors in distress. This lack of economic vigor is evident in the decline in consumer spending and the waning enthusiasm among investors. Where have those wealthy tourists gone who once frequented the luxury shops of Lucerne, Paris, or London? And when will they regain their former dynamic and entrepreneurial spirit?
The weakness of the Chinese economy extends beyond discretionary consumer goods such as cosmetics, although the recent underperformances of Sephora and Estée Lauder serves as striking examples. Other sectors, such as healthcare or consumer staples, have also suffered from reduced spending. This trend mirrors broader economic challenges, largely stemming from the instability in the real estate market.
Despite numerous measures adopted by the Chinese government, such as interest rate cuts, tax subsidies to stimulate consumption, and efforts to reduce excess housing inventory, the stimulus policy has far from delivered the expected results. The tepid execution and impact of these policies have left many investors disillusioned since the start of the year.
The major economic issue in China today seems to be a widespread loss of confidence, both among domestic and international business leaders and among consumers. While exports could have significantly supported GDP growth this year, further fiscal stimulus will likely be needed to achieve the annual growth target of around 5%.
The silver lining, if any, is that investor expectations regarding economic policy have been tempered to such an extent that any tangible corrective action could be positively received by the market. President Xi, known for his steadfastness, has often been slow to alter course, as was the case with his "zero-COVID" policy. It is to be hoped that he will also reconsider his approach to economic stimulus, to prevent China from sliding further into a prolonged economic slowdown.
Information technology companies, particularly semiconductor manufacturers, have reported strong results for the second quarter of 2024. Their figures have once again been strengthened by the massive demand driven by the substantial investments required for the development of Artificial Intelligence (AI). Nvidia, the undisputed leader in the field, released its results last week, exceeding the high expectations of investors. The company was once again able to surpass analysts’ ambitious estimates and has further raised its growth targets for the upcoming quarter. AI, still in the early stages of its development, has become a fundamental and essential theme for investors today.
The correction in the S&P 500, which saw a nearly 10% decline between mid-July and early August, now seems to have run its course. US equities have fully recovered their losses, with the index of the 500 largest US companies is poised to reach a new record.