Monday Jump Start podcast: Investing as inflation, stimulus views shift (5:00)
CIO's Jon Gordon discusses the week ahead, including key data on inflation and China stimulus prospects.

Thought of the day

Chinese equities retreated at the start of the week, after the release of data showing the nation's economy grew slower than expected in the second quarter, while retail sales and property investment also disappointed. Last week's inflation print added to worries over weak demand, with the consumer price index flat year-over-year in June. China's onshore CSI 300 fell 0.8% on Monday, and is flat so far in 2023, versus a gain of 15% for the MSCI All Country World Index.

Investors have so far been underwhelmed by the level of stimulus provided by Chinese authorities, despite the extension last week of 2022 measures to support the struggling property sector. The anticipation of a US executive order to limit outbound investment in sensitive high-tech sectors in China has also dented sentiment.

But we still believe in China’s consumer-driven growth recovery and think improving earnings and the potential for additional policy support can help boost confidence in Chinese equities in the second half of the year.

No “big bang” stimulus, but more policy support is coming. While the People’s Bank of China cut rates by less than some investors had hoped last month, the move helped accelerate China’s new loans in June. It also provided some reassurance that policymakers are committed to reviving demand. Behind the scenes, Chinese President Xi Jinping also called for deepening reform at a meeting last week. In our view, we see more targeted support in the pipeline for consumption, housing, and infrastructure. Another 1–2 cuts to the reserve requirement ratio (RRR) and one more medium-term lending facility (MLF) rate cut may materialize, if warranted by incoming data. Investors should expect more clarity from the Politburo meeting at the end of July, in our view.

Yellen’s visit could help pave the way for a "new normal" for the US-China relationship. For much of the post-COVID era, geopolitical tensions have damaged sentiment in domestic markets. But while tensions remain elevated, the recent high-level diplomatic re-engagement between China and the US shows some signs of stabilization. US Treasury Secretary Janet Yellen made the case for more market reforms and fair treatment of US companies during her trip to Beijing this month. But she also stressed that US-China competition is not a "winner-take-all" situation, and struck a positive but pragmatic tone, emphasizing the US won't "hold China back." With US climate envoy John Kerry in Beijing this week, more signs point to progress or normalization. Our base case is that geopolitical factors may even have a slightly positive impact on Chinese equities in the second half. We also favor segments more immune to geopolitical risks, such as industries less reliant on foreign microchip supplies.

Regulatory risks should subside as China ends tech crackdown. Financial regulators concluded more than two years of probes into Ant Group and Tencent Holdings earlier this month, kindling investor hopes that the industry may gain more support from policymakers. Chinese Premier Li Qiang also underscored this as he pledged to create a fair environment and reduce compliance costs. We believe stronger-than-expected policy support, ongoing cost control, and steady margins will be key to lifting the sector from current valuations.

So, we continue to think China's recovery beneficiaries should outperform thanks to more policy support. We suggest positioning not only in direct beneficiaries like consumer, internet, materials, and industrials, but also in indirect beneficiaries like financials and utilities, which offer high dividend yields. Amid the market volatility, we recommend a barbell approach for downside protection with high-yielding defensive sectors such as insurance, utilities, select banks, and high-quality state-owned enterprises.