David Chao, Invesco
There are emerging signs amid an uneven global economic recovery that China’s growth momentum is slowing, while the US outlook remains positive.
Yet as far as equities are concerned, Invesco is looking away from the US. “US stocks continue to reach new highs and appear fully valued to me. I’m more overweight on UK, EU and EM equities,” said David Chao, global market strategist for Invesco in Asia Pacific (ex-Japan).
Despite the Delta variants remaining a dominant risk in these countries, hospitalisation and mortality rates appear steady, even with the rise in infections.
“The market has also demonstrated its ability to look through Covid resurgences with a focus back to strong economic growth fundamentals,” added Chao.
China’s flexible policy stance
China’s State Council has said that a cut to its Reserve Requirement Ratio is forthcoming to help the country’s small- and medium-sizes enterprises better deal with rising commodity prices and other input costs.
According to Chao, this is a positive signal to the market, indicating that policymakers are flexible and sensitive to the changing dynamics of the domestic economy. “[This] could lead to greater liquidity in the market.”
At the same time, however, there are headwinds for investors to be wary of that will likely keep policymakers cautious.
For example, said Chao, it is becoming clear that China’s strong economic rebound may be stalling. Plus, the country has a high debt-to-GDP ratio and has seen a speculative property market boom.
“It is possible that the Q2 GDP may come in weaker than the consensus expectations of 8% year-on-year, or 1.2% quarter-on-quarter,” he explained.
Chao expects softness from the June industrial production data as global consumers shift to purchasing goods to services. Domestic retail sales data is also likely to reflect China continuing to grapple with a few Covid-19 outbreaks across the country.
Robust US data
By contrast in the US, the latest job report and service PMI data point to a continued healthy economic recovery – even if the strength of the rebound falls short of some investors’ expectations.
“The data points to a rebounding US economy driven by a robust vaccination rollout which might partly mitigate the risk of the highly transmissible Delta variants,” Chao explained.
It also reduces the chance the economy will experience further lockdowns.
“I remain confident that the Fed will remain accommodative and that any major policy moves will be well communicated with the market long before they actually happen,” said Chao. “It’s apparent to me that the market desperately wants the Fed to announce shortly it’s tapering schedule so that a key overhang could be removed.”
He believes US markets will largely shrug off the tapering news. “I am optimistic about recovery in the US economy despite some hiccups we may see in terms of Covid-19 cases.”