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February 5, 2024 - China: will history repeat itself, exactly 10 years after ?



In 2014, the local Chinese market started a rally which stopped at about 150% higher in a matter of just 15 months. That rally brought the local index 50% higher from the previous peak, offering profits even to those who had bought at the previous peak. It was mid-March of 2014, when the CSI300 index of local Chinese stocks reached its bottom, after almost four years of falling. During that period the index had dropped about 45% from its previous peak and pessimism was abundant.


Ten years later, will the New Year of the Dragon (February 10th) bring better fortunes to investors ? Currently, the Chinese market looks to be in a similar free-fall and the bear market is already in its third year. The drop from the previous peak is by coincidence about 45%, similar to 2014. Based strictly on fundamentals, current valuations look very tempting to increase exposure to the world's 2nd largest economy, as they are at the lowest level of the last 10 years, trading at just 9 times earnings. But this looks to be a very brave thing to do, as the vast majority of foreign investors have left the country and the consensus thinking is that the region is no more investable. The friction with the US administration has improved during the last twelve months, but the scenario of a Trump comeback makes us worry that things can easily deteriorate again. The measures taken by the Chinese authorities to restart the economy and to boost investors' confidence have only resulted to short-lived rallies for now. Still, history has shown that after similar periods of pessimism and precipitous falls, the rebound can be explosive. Ten years after, we wonder whether history is about to repeat itself.


On the opposite part of the world, the FED pushed back on a March cut, but left the door open. Through eloquent phrases, the Committee sent the message that we have seen the peak in interest rates and the next move should be a rate cut, the timing of which is the big debate between markets and officials. Mr. Powell chose not to declare victory and said quite flatly that the Committee's base case was not a March cut, but ultimately they would be data dependent. He also said that the Committee's inflation forecasts would likely be lower now than at the December FOMC meeting. With another Summary of Economic Projections in March, and the ability to use that for forward guidance, the market seems to be rather convinced that the FED cuts rates at the March meeting, although there are still no ample signs of a severe slowdown in the US economy.


The US Jobs market data sent mixed signals once again. We received a lot of data concerning the US jobs market, from various sources, which again rather confused us than provided a clear trend. The weekly initial jobless claims rose to 224k again and the more important continuing claims number jumped to 1.9mn from 1.8mn of the previous week, while the January ADP employment figure (private company) was announced at just 107k , which matches the lowest jobs growth of the last four years. These rather weak numbers were crushed by the "blow-out" government-provided January data which showed a 350k growth vs expectations of about 180k, while previous months were also revised higher. According to this survey unemployment fell further, to 3.7% from 3.8%. Which source should we really believe and on which data should we base our conclusion on what the state of the jobs market is ? Robust and accelerating as the government data show or weak and slowing as the private data show ? We do not have the answer.


The Eurozone narrowly escaped recession in the last quarter of 2023. The preliminary GDP estimate was announced at 0% quarter-on-quarter and at +0.1% year-on-year. This is marginally up from -0.1% q/q (0% y/y) in Q3. Estimates were calling for a small negative GDP growth in the last quarter, which would trigger the definition of a "technical recession" (two consecutive quarters of negative growth). The flat Q4 GDP growth also implies that in 2023 as a whole Eurozone GDP grew 0.5%. It is important to note that the catalyst for a better-than-expected growth came from the region's peripheral markets such as Italy, Spain, Greece as Germany, France and the northern countries' economic activity was a negative contributor. Germany is already in technical recession, but the south seems to be on the driver's seat.


We also had good news on the Eurozone inflation front. After a temporary increase in December, January inflation resumed its decline falling 0.1pp to 2.8% y/y broadly in line with the forecasts and slightly lower than the 2.9% of the previous month. We saw a minor disappointment from the Core CPI which also moved lower to 3.3%, from 3.4%, but the forecast was for a bigger drop to 3.2%. Food inflation dropped further (- 0.4pp to 5.7% y/y). but energy costs edged higher (+0.4pp to -6.3% y/y). The announcements also included the updated 2024 HICP weights for the major subcategories showing an upward revision in the weight of services (and core overall), while the weights of energy, goods and food were revised down. Looking ahead, expectations are that inflation will continue declining in the coming months and are currently tracking 2.3% y/y in February.


The Bank of England meeting revealed the first vote by a committee member for a rate cut. As expected, the BoE decided to leave rates unchanged at 5.25%, but the decision was not unanimous with a three-way split of the vote. Six members voted to keep interest rates unchanged, while one voted for a 25bp rate cut. We also have to mention that two members voted for another 25bp hike ! Despite the first vote for a cut, the overall tone of the Committee was more cautious. During the press conference Governor Bailey acknowledged that "things are moving in the right direction" and that inflation has been falling faster than expected. However, he cautioned that it is too soon to take the decision on rate cuts, along the lines of the recent ECB and the FED meetings.


Six out of the "Magnificent-7" companies have reported quarterly results, and most of them had a negative price reaction. Tesla, Alphabet, Apple and Microsoft saw their share prices correcting after their not-so-great results, while Amazon (+7%) and Meta Platforms (+20%) provided significant gains for their shareholders. Overall, the week proved to be positive for US stocks (S&P500 +1%, Nasdaq +1.5%), but Europe finished on a slightly negative note ( France -0.3%, Germany -0.4%, Switzerland -1.3%). In terms of sectors, we continue to see a major divergence in performances, similar to the first half of last year. It is worth noting that six out of the eleven sectors of the S&P500 are negative , while the index is up by 4% since the start of the year.


Bonds finished on a slightly negative note, despite the initial rally. The weak data from the jobs market in the US together with the dovish FED sparked a mini rally in bonds, with the 10-year US Treasury yield reaching a low of 3.85%. But the other jobs data on Friday which proved to be strong and contradictory to the previous days' data caused a mini-sell off in bonds and yields rose about 15bp from their lows. The US 10-year rose back above 4%, while the German equivalent closed the week at 2.25%.


Chart of the Week : The Euro Stoxx50 outperformed the S&P500 in January.



With a strong finish during the last week of January, the Euro Stoxx50 (blue line) managed to surpass the S&P500 (green line) and register a 2.8% gain for the month. The S&P500 rose by a very respectable 1.6%, which was also slightly lower than the 1.8% rise of the Swiss SMI index (black line). The catalyst for the big reversal of fortunes for Eurozone equities was initially the fresh stimulus measures of the Chinese authorities which impact Europe more than the US, and then the better-than-expected corporate results by the likes of ASML, SAP and LVMH. With the US Technology related companies having a big weight on the S&P500, any further outperformance of the Eurozone equities will hinge on Tech underperforming the other sectors in the weeks to come, otherwise it would be difficult to keep up the pace.


Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources, Chart of the Week : FactSet,

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