Investors’ Outlook: Budding hope

A blizzard of economic data swept through markets in March, with investors combing through the flurry. But amid the thawing investment landscape, China’s economic narrative revealed small but hopeful glimmers of progress.

While it has become commonplace to label China as “uninvestable”, for long-term investors to shun and disregard the potential of what will soon be the world’s largest economy – even at current growth rates – is not a feasible strategy in our view.

At China’s annual meeting of the National People’s Congress early last month, messaging tilted toward a focus on growth following years of putting geopolitical priorities and security in the spotlight. The government kept its 2024 growth target at around 5 percent, unchanged from the previous year, and pledged to transition to advanced manufacturing and efforts to mitigate risks in its property market. It also set its consumer inflation target at 3 percent.

We believe this might be the first sign that Chinese officials recognize the need to pay more attention to the economy again. While investors have been disappointed by the lack of major support measures so far, in our opinion, reaching that 3 percent inflation target won’t be possible without fiscal stimulus, structural reform, or monetary impulse. It will be up to the Chinese officials to decide on which steps to take, but it seems clear to us that they will have to do something.

China’s challenges have led some market observers to point out parallels to what transpired in Japan in the 1990s, when the fading economic miracle resulted in the so-called Lost Decade. As we highlighted in last month’s deep dive into whether China is facing a similar fate, there are indeed some notable similarities in structural problems, such as unfavorable demographics in the form of low birth rates and a shrinking working-age population, low consumer demand, and an ailing property sector. The latter remained under pressure in the first two months of the year, with property investment down 9 percent compared to the year-earlier period.

The stimulative arguments, including special ultra long-term bonds and the willingness by the People’s Bank of China to make more cuts to the reserve requirement ratio, are positive signals. China’s industrial production also rose at the fastest pace in almost two years, jumping 7 percent year-on-year in January and February, beating economists’ expectations of 5 percent. Retail sales came in slightly better than anticipated as well, boosted by Chinese New Year spending. When we further consider an uptick in foreign direct investments in China, which had dropped into negative territory for the first time in 25 years in the third quarter of 2023 but recovered in the final quarter of the year, we’re left asking ourselves: has China’s fizzled economic recovery finally started to take hold?

It is early days yet, but we see the first sprouts of hope and the potential that China could be on the path to recovery. While it may be a tricky one to tackle, improved capital flow and signals of a willingness to domestically do what it takes to stimulate growth would open the door to the possibility of a nice rebound in China.

This Investors’ Outlook provides you with a deep dive into the Eurozone economy, a closer look at commodity prices, and details on our asset allocation.

Traversing the slope toward economic recovery may be slippery, but we always aim to provide our clients with steady footing.