Fidelity International’s head of equities for the Asia-Pacific (APAC) region has sounded a dire warning, cautioning that the fallout from Silicon Valley Bank’s collapse will soon reach this part of the world.
This is on top of an already challenging environment, with ongoing uncertainty over the future path of the global economy and interest rates, says Marty Dropkin, head of equities, APAC at Fidelity International.
“The global equity rally since the beginning of the year has faded after a bruising pullback last month with persistently sticky inflation and hot labour markets forcing market participants to change their outlook on the path of interest rates,” Dropkin writes in a March 16 note.
Global equities may face difficulties in the upcoming weeks and months due to the current interest rate environment and high stock valuations. Dropkin believes an earnings correction will occur this year. “There are already some traditional early indicators.”
Companies have begun to give more cautious guidance, says Dropkin, and some early-cycle industries, like consumer discretionary, are beginning to issue profit warnings. “There have also been an increasing number of layoff announcements. These are glaring indications that businesses are beginning to feel pressure on their profit margins.”
Chinese rally pauses
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Chinese equities posted a monthly decline last month, snapping a three-month rally post Covid-19 restrictions, says Dropkin. “After trading sideways in recent weeks, we think this is a temporary pause — improving corporate earnings are likely to take over from cheap valuations as the main driver in the next stage of the rebound.”
According to Dropkin, Chinese firms continue to benefit from favourable tailwinds, with factory sector growth in February at the fastest pace in more than a decade and total social financing (TSF) growth — a broad measure of credit and liquidity in the economy — continuing on an upward trend.
This coincides with China's 14th National People's Congress, which convened from March 5 to 13, with further clarity over economic policies spelling good news for Chinese equities in the long run, says Dropkin, providing a tailwind for China’s trading partners.
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“For instance, increased exposure to China at a time when the US has been working to lessen its reliance on the world’s second-largest economy has benefited Europe's automakers, luxury goods and mining companies, especially post pandemic,” he notes. “With market participants hunting for better returns, European markets, which are heavily weighted towards financials, are becoming more favourable than their American rivals, with relatively expensive technology stocks.”
In Dropkin’s view, Europe continues to be undervalued versus its American peers, at least at the index level. “More broadly, Europe’s economy remains resilient.”
China’s property market sparks to life
Homebuyers are back in action in China, but consumer confidence remains fickle, says Victoria Mio, head of equity research, APAC at Fidelity International.
“China is counting on a pipeline of pent-up demand to power its housing market rebound. Two years of tightened regulatory restrictions fed a nationwide rout in China’s real estate market that cleared away most of the speculative froth,” Mio notes in a March 14 commentary. “What’s left, our research suggests, is real underlying demand — but we are yet to see how deep it runs and if it is enough to stage a sustainable rebound.”
According to Mio, official data and Fidelity's observations on the ground both show new signs of heightened housing market activity in China’s top-tier cities.
The momentum has picked up in recent weeks, with an increased number of visitors to real estate showrooms and some new housing projects selling out within 24 hours of listing, she adds. Existing home prices in Tier 1 cities rose 0.4% on a sequential basis in January, reversing December’s 0.5% contraction.
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While a rebound appears to be playing out in China’s megalopolises and provincial capitals, it is not yet clear that this will spread to lower-tiered cities, where there is a large amount of unsold inventory, says Mio. “Policymakers will need to provide more support for homebuyers on the demand side to ensure that nationwide transaction volumes will grow year-on-year.”
Real estate remains a huge driver for China’s economy, and as the pandemic dragged down growth, policymakers last year started loosening purchase restrictions in some cities and relaxing funding curbs on property developers.
New home prices in both Tier 1 and Tier 2 are showing signs of improvement, says Mio. “For the current rebound to gain momentum, prospective homebuyers have to feel confident enough to tap the huge amount of excess savings they amassed during the pandemic.”
Chinese authorities have reinforced that China will prevent disorderly expansion by property developers and promote the sector’s stable development. In the long term, demand will drop in tandem with demographic changes, as the population shrank last year for the first time in six decades.
This could lead to more credit divergence between the strong and weak developers this year, notes Mio. “Private property developers will continue to be overshadowed by state-owned firms, which have easier access to funding and have more confidence among homebuyers.”
“It’s probably not enough yet to declare a nationwide rebound for China’s property sector. But as we’ve seen in recent weeks, the post-Covid pent-up demand is real.”
