China

While we are sympathetic to the view that the Fed could temporarily achieve a soft landing, we are skeptical that it could stick that landing for very long. Stocks could strengthen into year-end, with small caps potentially leading the charge. But the rally will fizzle out next year as the global economy begins to sink into recession.

While Chinese stocks have low valuations and are oversold, their attractiveness is dampened by uncertainties in the magnitude of stimulus and the dismal outlook for corporate profits in the next six to nine months.

If we look at global growth as an aircraft, the plane is experiencing failing engines and will lose more altitude in the coming months. Yet, neither Chinese authorities, nor the Fed or the ECB will be quick to come to the rescue as global growth downshifts. These dynamics herald a stronger US dollar and lower EM risk asset prices.

The CCP’s fiscal measures and property-market support are important steps to deal with China’s liquidity trap. The fiscal measures are the first such direct aid to households and small firms seen since 2020, which included tax relief and waived social security contributions, according to the IMF. The size of the programs has not been disclosed. If they are successful, global commodity demand will get a boost at the margin, particularly oil and base metals. We remain long equity ETFs to retain exposure to energy and metal producers and refiners, and long the COMT ETF for direct commodity exposure.

The geopolitical backdrop remains negative despite some marginally less negative news. China’s stimulus is not yet large or fast enough to prevent a market riot. Two of our preferred equity regions, ASEAN and Europe, are struggling to outperform. Investors should stay defensive overall.