Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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China is back, or what?
Peter Garnry
Chief Investment Strategist
Key points
- China pulls out the big bazooka: China boosts its economy with stimulus measures, including support for the stock market and lower interest rates, raising questions about long-term effectiveness.
- Micron earnings and growth: Micron's positive outlook signals strong growth tied to AI and a future recovery in the PC market.
- Health care as a growth sector: The health care sector has historically outperformed the market, driven by innovation, patents, and AI, positioning itself as both a growth and defensive sector.
- Upcoming events: Key events include Nike's earnings, German inflation, and the US jobs report, which could impact market expectations.
China pulls out the big bazooka
Chinese equities traded in Hong Kong are up 20% from their lows earlier this month as the Chinese government pulled out the stimulus bazooka including support for the stock market. The People’s Bank of China has also recently lowered key benchmark rates and other measures have been implemented to shore the distress in the Chinese property sector. In the short-term, tactical traders and momentum chasing investors are bidding up Chinese equities, but for the long-term investor the fundamental question is different. Is this enough to break the downward spiral from its balance sheet recession that China is facing.
The excessive private sector debt in China means that lower interest rates may not solve anything like the developed world learned in the aftermath of the Great Financial Crisis. For China the problem is even bigger. China’s pension age is 60 and the dependency ratio was 46.6% in 2022 and is expected to surge in the years to come. That means a larger part of the population will live from passive income and thus lower interest rates will both suppress passive income for the elderly non-working population, but for the working population higher savings rate is needed to generate a meaningful passive income in the future. That could lower consumption in the economy and make it more difficult to get out of the balance sheet recession.
Some of the best performing Chinese stocks in the Hang Seng Index, the leading Hong Kong benchmark index, are Meituan and JD.com reflecting increased expectations for higher consumer spending. In Europe, we have seen similar reaction in luxury stocks such as LVMH.
What does Micron earnings tell us about growth?
Micron Technology reported a better-than-expected outlook on Wednesday due to the boom in AI. The DRAM memory chip market is booming with tight supply driving prices higher and the chipmaker expects unit growth again in the global PC market in 2025. Micron Technology has always had a strong correlation to the global economic growth cycle. An upbeat outlook from Micron is a positive macro indicator.
Health care as a growth sector
On Wednesday, I did a presentation on the global health care sector for some our clients. The other presenters were Claus Henrik Johansen, Chief Investment Officer, at Global Health Invest which is a new mutual fund expected to IPO 1 November 2024 on Nasdaq Copenhagen. Claus comes with 20 years of experience in the health care sector as a senior portfolio manager at Danske Bank Asset Management. The last presenter was Henning Langberg giving insights into how technology, including AI, is already being implemented in the Danish health care sector and what the potential is for productivity gains in the future.
I could write for an hour of all things I learned, but some of the key take-ways were the following:
- The global health care sector is a growth sector
- It has outperformed the global equity market by 1.5% annualized since July 2000
- It has lower drawdowns that the global equity market during crises and recessions
- The sector enjoys competitive advantages through patents and R&D investments
- AI is going to play a crucial role in drug discovery and health care services
- We will all get a health care digital-twin
- Apple is going to be a key player in the future health care sector
One of the key charts that I showed was the one below. It shows the revenue per share cumulative growth over the past 10 years. The key insight here is the remarkable consistency in growth and its extremely low sensitivity to the economic cycle. In other words, the global health care sector is both a growth and defensive sector at the same time, which is a very unique characteristic not shared by many other sectors or industries.
The week ahead: Nike earnings, German inflation, and US jobs report
- Earnings: The key earnings to watch in the week ahead are Nike (Tuesday, aft-mkt) and Carnival (Monday, bef-mkt) with Nike earnings expected to pull the most attention from investors. Nike has had a rough past year rallying hard in late 2023 before entering 2024 with a lot of hiccups including the worse-than-expected outlook announced back in June. Analysts expect Nike to report FY25 Q1 (ending 31 August) revenue of €11.7bn down 10% YoY as Nike right now have a product gap relative to Adidas in sports fashion shoes, which is also why Nike has emphasized that it wants to speed up innovation. The new CEO, Nike veteran Elliott Hill, has a steep journey ahead of him to turn around Nike.
- German inflation: The report is out on Monday with economists expecting German inflation to hit 1.7% YoY for September down from 1.9% YoY in August. This should provide the ECB with more room for lowering the policy rate despite the central bank’s worries over elevated wage growth in the Eurozone. The is now pricing 80% probability that the ECB cuts its policy rate at the next meeting on 17 October up from 50% probability the day after the last ECB rate decision on 12 September.
- US jobs report: On Friday the US jobs report will add another layer to the US labour market picture which is the new focus of the Fed. We know from the JOLTS job openings report (out this Wednesday) that the labour market is a lot less tight than a year ago, but the weekly time series from Indeed shows that the US labour market is stabilizing. Economists expect the US jobs report to show a gain of 140k in September on par with the gain for August at 142k. Traders will also focus on the average hourly earnings figures for clues about the outlook for consumer spending.
Previous weekly equity market updates
- The Fed’s great balancing act (13 September 2024)
- Nvidia earnings will show another quarter of explosive growth (23 August 2024)
- The big rebound in equities, Palo Alto earnings on tap (16 August 2024)
- European banks: Strong Q2 earnings as rate cuts loom (14 August 2024)
- Low recession probability, strong earnings, and US inflation (9 August 2024)
- Election drama, Tesla bounce, and earnings kick-off (5 July 2024)
- US election heats up, Alfen rout, and Micron earnings (28 June 2024)
- French election, king Nvidia, and FedEx earnings (21 June 2024)
- Tech rally, inflation surprise, and EU trade war (14 June 2024)
- AI bonanza drives new highs and dangerous index concentration (7 June 2024)
- Chinese setback, AI woes, and ECB decision (31 May 2024)
- Nvidia earnings, electrification boom, and bubbles (24 May 2024)
- New all-time high on speculative stocks comeback (17 May 2024)
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