Chinese surprise – Damien’s Market Update – October 2024

In this episode of Damien's Market Update I explain why the coming weeks are critical for gauging the direction of Chinese equities and broader emerging markets.

A lot has happened in investment markets this October, and for once the catalysts haven’t just been centred around US politics or US monetary policy. But first, let’s rewind a little. Back in September, we witnessed a pivotal moment for global markets: the US Federal Reserve officially fired the starting pistol on policy easing. Initially, the market expected a modest 0.25% cut, but in the end it got a more aggressive 0.5% cut.

Once Fed Chair Jerome Powell reassured markets that the move wasn’t an emergency response to recession fears, but rather a strategy to sustain growth and lower inflation, equity sectors sensitive to interest rates—like tech—surged. By the end of September, both the S&P 500 and Dow Jones hit fresh all-time highs. It was clear that investors were buying into the "Goldilocks" scenario: where the economy wasn’t too hot to worry about runaway inflation, but not too cold to trigger a recession. The optimistic mood naturally bled over into other global equity markets and that was where we found ourselves at the end of my last show.

But since then investors’ attention has shifted eastwards. That’s because in the final days of September, China announced its largest economic stimulus package since the pandemic. The People’s Bank of China (PBoC) cut rates, loosened lending requirements and rolled out measures to boost the country’s struggling property market. The Chinese stock market responded positively, with the CSI 300 index surging nearly 11% in a week, marking its best weekly performance since 2008. Investors were optimistic that the PBoC’s measures would reignite growth, especially in China's struggling property sector, which had been weighing heavily on the broader economy.

But investors have since been left in something of a holding pattern, waiting for more clarity on fiscal policy from the Chinese government. They eventually received some supportive statements from President Xi Jinping at the end of last week. This proved positive for the Chinese stock market, and emerging markets more generally, with the former now aiming to finish October in the green and up more than 20% since mid-September. The big question is whether Beijing will deliver on its promised stimulus plans, or if the recent stock market gains will prove short-lived. Either way, the coming weeks are critical for gauging the direction of Chinese equities and broader emerging markets.

Elsewhere, gold has finally broken through the $2,700 barrier, hitting a number of new all-time highs. This is exactly why I’ve kept gold as a core holding in my 80-20 Investor portfolio; it’s a hedge against uncertainty, and right now, that uncertainty is coming from all directions: rising bond yields, geopolitical risks, and easing central bank policy. But gold isn’t the only asset hitting new highs. In Europe, the German DAX reached an all-time high last week, helped along by yet another interest rate cut from the European Central Bank. The FTSE 100 also surged to a two-month high after UK inflation fell to its lowest level in three years—1.7%. This unexpected drop in inflation pushed the pound below the $1.30 mark, giving UK equities, especially those with US dollar revenues, a nice boost.

Across the pond, the Dow Jones and the S&P 500 continued their streak of record-setting. The S&P 500 posted its 46th all-time high of the year last week, buoyed by positive earnings results from the likes of Netflix. But let’s not forget the bond markets. Rising oil prices and persistent inflation fears and concern over a possible Trump US election victory (and his subsequent spending plans) have pushed bond yields higher. The 10-year US Treasury yield, for example, has hit a 3 month high. That is putting pressure on global bond funds. We are also seeing a similar rise in UK gilt yields (and mortgage rates)as investors are reevaluating the Bank of England’s ability to continue to cut interest rates in the future.

It means that we find ourselves with global stock markets (including previous laggards such as China) in buoyant mood. But despite the recent wave of new all-time highs (or at least recent highs), some investors will be concerned that valuations are becoming stretched and that their peers are complacent about the potential risks. After all, we still have a US election on the horizon as well as geopolitical tensions in the Middle-East which have pushed the oil price higher. Not only that, but the current bull market in US stocks celebrated its second anniversary last week. Isn’t it getting a bit long in the tooth?

In the short-term, Goldman Sachs certainly believes there is more to come. The bank forecast that the S&P 500 could end the year significantly above 6000 (it’s currently at 5785). Based on the bank's analysis of historical data going back to 1928, the median return from mid-October to the new year for the S&P 500 is 5.17%. In election years, this number rises to just over 7%, which would suggest that the S&P 500 could reach 6270 by the end of the year. As for the longer-term, J.P .Morgan has published a note stating that the median U.S. bull market lasts 46 months, based on historical data. The median bull market total return is also 110%. The current bull market is only 24 months old and has produced a total return of 60%. History suggests that time and money remain on the bulls’ side, if anything it's only half-time.

So, while the markets are riding high now, there’s plenty to keep an eye on—whether it’s earnings, elections, or geopolitical risks. And of course, gold continues to shine.