Chinese vice premier Liu He heads to Washington this week and Fed is expected to hold rates steady
Chinese growth is slowing but no more than expected, say fund managers interviewed by the Association of Investment Companies.
Dale Nicholls, portfolio manager of Fidelity China Special Situations, said:
China is facing a slowdown, but this is already well documented and the growth rates in China remain the envy of most economies. The authorities’ focus on deleverage has been the main catalyst for a slowdown as this has impacted access to funding and subsequently impacted business and consumer confidence.
There has been a slowdown in the rate of growth of consumption, particularly in larger durable goods such as cars. This has not been helped by falling markets and the sense that house prices have peaked. However, retail sales are still showing high single digit year-on-year growth despite the decline in car sales and, even with a general economic slowdown, the medium-term prospects for earnings growth remain strong.
Chinese growth is slowing although not by more than we would have expected. The rising base ensures that the growth of the past cannot be repeated, while the reforms of state-owned enterprises and the clampdown on non-bank credit will put pressure on growth in the short to medium term.
These headwinds are being offset by measures to promote consumer spending and by tax cuts to corporates and individuals. This should be seen as a positive as the government pursues a policy of sustainability, rather than the old model of pump priming through debt-funded investment. Ultimately, the quantity of growth may slow but the quality will improve.
The scope for China to undertake major stimulus measures is now much more limited – unless they wish to suspend the effective renminbi peg. We expect the Chinese economy to continue to slow in 2019 as a result of the authorities’ desire to rein in excessive leverage and bring shadow banking back to balance sheets.
Given the pegged currency, a current account no longer in surplus and a leaky capital account, we view the monetary options as limited assuming devaluation is not considered an option – this would cause market chaos and global deflation.
The latest round of high-level US-China trade negotiations, which kick off in Washington on Wednesday when Beijing’s vice premier Liu He’s delegation arrives, come before the start of Chinese New Year next Tuesday, ushering in the Year of the Pig.
So how are China-focused fund managers viewing the threat of trade wars, the current state of the Chinese economy and the prospects for their investments? The Association of Investment Companies has spoken to some of them.
We remain sceptical of any real let-up in US and China tensions despite Trump’s suggestions that a deal will be completed. As highlighted several times last year, it is clear that US-China tensions are not just about trade, but something much bigger. It involves US perceptions around China’s intellectual property theft, cybercrime, the way China projects its political and financial power via One Belt One Road and China’s desire to dominate key industries via massive state subsidies through Made in China 2025.
We should see a resolution on tariffs as it is in the interest of both parties. However, the political dimension means we do not have strong conviction. We do think that domestic Chinese equities have discounted a very pessimistic outcome: both a trade war and growth slowdown. Consequently, we are beginning to see value in several areas of the A-share market. Whatever the outcome of current negotiations we believe China and the US will increasingly compete in areas of technological innovation from electric vehicles to artificial intelligence.
At a macro level, the trade war between the US and China has the potential to cause continued, serious, short-term global disruption. However, this disruption may have unexpected benefits for certain regional economies. For instance, companies may seek to shift production from China to other Asian countries.
Furthermore, if volatility in public markets continues to prevail, we would expect to see both Chinese and Asian SMEs increasing their reliance on private financing sources as they will still require capital to fund ongoing regional growth opportunities. We believe the most exciting investment areas will be those driven by intra-Asian consumption.
Cash remains king among rich investors, despite low interest rates, new research from Rathbone Investment Management shows.
A quarter of high-net worth investors – those with more than £100,000 in investable assets – currently hold more than half of their wealth in cash, despite interest rates for savings remaining low.
Cash remains king as investors remain cautious. Despite the threat of low interest rates devaluing their wealth over the long term, investors still believe cash to be the safest option for their money. This is largely down to the economic and political uncertainty currently at play in the UK and wider afield. Investors are concerned about the impact that impending events such as Brexit will have on the markets and therefore are hesitant to invest a significant proportion of their wealth into the markets.
The Financial Conduct Authority is consulting on measures to stop up to 100,000 people a year losing out on pension income when they access the pension freedoms.
The City watchdog has previously expressed concern about consumers moving into drawdown and holding their funds in investments that will not meet their needs. The FCA is proposing that firms offer customers who do not take advice a range of investment solutions that broadly meet their objectives, known as ‘investment pathways’.
The pension freedoms give consumers more flexibility in how and when they can access their pension savings; but that also means they have to make more complicated choices.
Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the ‘path of least resistance’ when entering drawdown. This can often mean that the rest of their drawn down pension pot is not invested in a way that meets their needs and intentions. We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested.
Unite, Britain’s biggest union, is calling for urgent talks with Tesco bosses, following reports that Britain’s largest retailer wants to axe up to 15,000 jobs.
Unite has 1,000 members at four Tesco distribution centres, at Belfast, Didcot (Oxfordshire), Doncaster and Thurrock in Essex.
Our top priority this week is to arrange a meeting with Tesco’s management to get a clear picture of what the supermarket is planning.
This is a very worrying time for our members who deliver to Tesco stores across the UK. While the reports centre on job losses in-store, such as at the bakeries and deli counters, we still need to know what this could mean for our members.
The FTSE 100 index briefly ventured into positive territory before slipping back into the red and is now down 0.01% at 6860.19. Traders are waiting for the latest round of trade talks between Beijing and Washington, due to start on Wednesday, and the outcome of the Fed’s monthly policy meeting on the same day.
Most of the UK’s most popular cars are at risk of theft using technology that exploits keyless entry, according to the consumer group Which?.
The Ford Fiesta, Volkswagen Golf, Nissan Qashqai and Ford Focus – four of the top five models sold in the UK – are among the popular cars that are susceptible to theft using “cheap electronic equipment bought online”.
Explainer continued – courtesy of Reuters.
What has happened in the trade talks so far? In Buenos Aires in December, presidents Trump and Xi agreed to negotiate over structural issues, including “forced technology transfer, intellectual property protection, non-tariff barriers, cyber intrusions and cyber theft, services and agriculture”. But there was little progress on these issues at a round of talks among mid-level officials in Beijing earlier in January. Instead, Chinese officials offered to substantially increase purchases of US products.
Reuters has done a useful explainer on the trade negotiations. The two sides are trying to resolve deep differences over China’s trade and intellectual property practices, industrial subsidies and market access – to ward off an increase in US tariffs on Chinese goods on 2 March.
What are Washington and Beijing fighting about? After years of steadily rising US trade deficits with China and US complaints that Beijing has systematically obtained American intellectual property (IP) and trade secrets through coercion and outright theft, the Trump administration last year demanded fundamental changes to China’s economic model to allow US companies to compete on a more level playing field. These include an end to policies that Washington claims effectively force US firms to transfer their technologies to Chinese partners and full protection for US IP rights.
Neil Wilson, chief market analyst at Markets.com, says:
All the big European indices were lower on Monday after a firm rally on Friday ran out of steam. Pause for breath or just lack of conviction in any rally? The major indices continue to make new highs from the December troughs so at present it does rather appear momentum is to the upside, albeit the FTSE 100 is a notable underperformer compared with peers.
It’s of course a massive week for pound traders as the Brexit vote round two takes place on Tuesday. Expect some real volatility around the votes as we witnessed last time – there will be lots of noise.
Equity markets are set for a big week as we look ahead to those talks. Both sides have reason to make a deal. However I would think that with Trump reopening the government after the shutdown, he is in a strong position than he otherwise might have been had the Federal government still been shut by the time the Chinese officials landed.
The pound has fallen 0.3% against the dollar to $1.3162. Against the euro, it drifted 0.1% lower to 86.57 pence.
It’s another big week in Westminster: MPs will vote tomorrow on amendments to Theresa May’s withdrawal deal with the EU.
Gold has slipped but remains near a seven-month peak, boosted by expectations that the US Federal Reserve will keep interest rates unchanged at this week’s meeting, the first this year. The Fed lifted rates four times last year and has signalled two more hikes this year.
Spot gold is trading around $1,301.14 per ounce, down 0.17% (following a 1.8% bounce on Friday), while US gold futures climbed 0.12% to $1,299.6 per ounce.
Germany’s Dax, Spain’s Ibex and Italy’s FTSE MiB have opened 0.4% lower while France’s CAC is down 0.5%.
The FTSE 100 index has opened 21 points lower at 6787.094, a 0.3% drop. Ocado is the main riser, up 6.5% at 999.5p, after it emerged that the online grocer has held secret talks with Marks & Spencer over the launch of a food delivery service. Shares in M&S are also up, by more than 2%.
Ocado has had a tie-up with Waitrose for the last 20 years but the current supply deal ends in September 2020. City analysts expect the two businesses, which have always had a stormy relationship, to part ways.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The latest round of trade talks between the US and China begins in Washington this week, where a delegation led by Chinese vice premier Liu He is due to arrive on Wednesday.
A lot of this still seems more like wishful thinking than anything else, given the parliamentary arithmetic, as well as the politics.
Markets seem to have a lot more faith in politicians than many think they deserve, nonetheless the pound hit 18-month peaks against the euro on the basis that an article 50 extension could well find its way into an amendment when parliament meets to debate the latest attempt to break the deadlock over the UK’s withdrawal agreement and political declaration tomorrow.