(24 October 2019 ) DAILY MARKET BRIEF 2:Waiting for clearer signs in China
A lot of investing in China this year has depended on trade negotiations with the US, and recent trade talks between the two countries were constructive.
The White House shelved the tariff increase scheduled for this month, and Beijing is expected to make large purchases of US agricultural products. Although details are scant and signing will have to wait until the APEC summit in November, the optimism for a deal that would halt further tariff escalations has lifted market sentiment and supported risk assets like equities and corporate bonds.
However, China's domestic macro developments are not conclusive enough to position portfolio for a stronger economic growth backdrop, according to UBS CIO Global Wealth Management analysts.
On the bright side, in September the official manufacturing PMI improved month-on-month, with production and new order sub-indices edging up and staying above 50; industrial production growth bottomed out from a decade-low in August; and total social financing improved for the second month in a row.
On the other hand, import and export growth contracted further, retail sales were near a 15-year low, and 3Q GDP grew at the slowest pace since quarterly data was first reported in 1992.
CIO is therefore staying neutral between bonds and equities in its China tactical asset allocation.
"We need to see more positive signs from the Chinese economy or clearer policy easing signals before taking more equity risk," the analysts noted.
On equities, CIO remains overweight offshore Chinese equities relative to onshore stocks. This is because CIO believes the offshore market has more potential to catch up on performance if China and the US sign a phase one deal in November.
In fact, following Liu He's visit to the US on 12 October, the offshore market rebounded while onshore shares dropped.
For fixed income, CIO maintains its preference for corporate credit with a slight long duration bias. It is overweight investment grade and high yield enterprise bonds relative to CGBs and commercial paper.
One thing to watch will be the Politburo meeting at the end of this month for further policy direction
By UBS
