March exports were stronger than expected
Q1 GDP declined by a record 6.8% year over year, but March activities improved
The S&P 500 forward P/E troughed at 13x and has risen to 19x, at year-to-date highs. Forward next twelve months (NTM) EPS on the other hand has fallen 11% since the March low and 15% since the February high. Thus, the 28.5% rally from the bottom looks fueled by a 46% jump in P/E. We use existing and new frameworks to assess what drove the P/E swings and respective sensitivities. With the P/E overshooting our implied P/E based on the drivers below, on the way down and up, a further re-rating higher near term looks unlikely with spreads repricing so much and UST issuance coming. A spike in new COVID cases is an asymmetric downside risk, while sustained lower cases could provide some support.
Recovery to continue, but may be hampered by global downturn
Our activity tracker shows that economic activities continue to normalize, with the industrial sector faster than some services sectors. While we expect this trend to continue and pent up demand to be released, consumers may stay cautious for longer either due to income drop or lingering concerns about new cases rising again. In Q2, expected global recession is a big headwind for China's recovery, as exports could contract by >20% year over year. Weaker exports could lead to ~10 million job losses in related sectors, and hurt corporate investment. In addition, supply chain disruptions in the US and EU could impact China's domestic production.
Policy support has been limited, but more should come
The People's Bank of China (PBC) has injected liquidity, followed by two targeted reserve requirement ration (RRR) cuts, 30 bps medium lending facility (MLF) rate cut, and RMB 1.8 trillion special re-lending and re-discount facilities. Banks were also given regulatory forbearances. Thus, total social funding (TSF) credit growth rebounded to 11.6% year over year in March. Meanwhile, we estimate that fiscal-type of policies announced so far were about 1.2% of GDP. Some local governments rolled out small-scale consumption coupon and subsidies. We expect more policy support to come, including >1.5% of GDP in additional spending, mostly on infrastructure, and more monetary easing to help credit growth to rise to 12.5%. In addition, recent liberalization of land and hukou policies could help push both property and infrastructure investment.