China’s stock market rallies - Raiz Invest


George Lucas, Raiz Group CEO

I have not written about China for a long time, so this week I thought it was about time, especially given the recent rally in the nation’s stock market. We have seen Chinese stocks back in vogue after months of virus lockdowns and regulatory crackdowns slashed trillions off benchmark gauges.

Looking ahead, I am not sure the recent China rally sets the stage for extensive gains for the rest of 2022, even though unlike most equity markets the MSCI China Index has been rising since mid-May.

In my view, the rally is largely being driven by easing restrictions in Shanghai and Beijing and the lift in sentiment due to authorities getting new cases of COVID under control there. Additionally, we are seeing some signs that the authorities’ stance on the tech sector in China may have softened.


China’s economic recovery in spotlight

Still on China, I expect China’s economic recovery will probably be much weaker than the rebound following the GFC.  While policymakers have stepped up support for the economy this year, it is still likely to fall short of the kind of large-scale stimulus the Chinese economy received after the GFC.

Also, there is inflation to consider, which is eroding household real incomes in key China export markets and is coupled with global consumption patterns shifting away from goods to services. Declining export growth often coincides with weaker growth in earnings in China.

Another risk is China’s rigid commitment to its zero COVID strategy. With COVID cases again rising globally, there is a clear and present risk of further big disruptions to activity if they pick up in China.


Russia in debt default: reports

Elsewhere, Russia’s government reportedly defaulted on its foreign currency-denominated debt after failing to make a coupon payment during the 30-day grace period on a bond due May 27.

On the default, Washington credited sanctions for effectively cutting Russia from the global financial system, while Moscow claimed that the reserves were unlawfully blocked.

But let’s not overstate the significance. For a country that can’t function in the global economy due to the number of sanctions, the default is unlikely to have any extra impact and is largely symbolic.


Markets dragged lower on commodity price falls

Meanwhile, further falls in commodity prices will likely contribute to continued underperformance of commodity-heavy equity markets and currencies. Amid volatility in bonds and equities, a key development is a general fall in commodity prices as concerns rise about slower economic growth.

Further on this, since the peak in oil prices on June 9, the S&P GSCI spot indices for energy and industrial metals, for example, have declined by about 9% and 12%, respectively. The industrial metals index has now more than unwound the massive gains it made in Q1 of this year.

Notably, we’ve seen equity indices like Australia, where commodity producers have high weights, go from big outperformers to underperformers. And as global growth underwhelms and supply kinks continue to be ironed out commodity prices will probably continue to fall this year.



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