Thought Of The Week
FOMC Meeting, Big Tech Earnings
Markets were whipsawed this week as market participants juggled with China’s clampdown, earnings season, delta virus variant and central banks’ policies. There was little surprise from Fed’s July statement on interest rate and tapering since it has repeatedly emphasized its accommodative stance until unemployment comes down which translates to 7 more million jobs to be filled. Even though Fed has begun to discuss the timing and pace of easing off stimulus, it is unlikely to have a sustainable risk of a major correction for the U.S market given tremendous liquidity and sustained earnings growth from index companies. Rather, scaling back bond purchases later this year should prevent growth from overheating.
Meanwhile, megacap technology companies reported strong-than-estimates earnings but weaker forward guidance and slowing growth which capped tech-heavy Nasdaq. As the economy opens and vaccinated consumers revert to old habits like traveling and dining out, tailwinds that supported megacaps last year dissipated.
Wild Week for Chinese Stocks
China’s sweeping clampdowns on technology, ride-hailing, food delivery and education led a broad sell-off in Chinese stocks this week, leaving investors worried how much further the regulatory onslaught would go. Afterall, if a document can make an industry disappear directly, investors will not want to invest in the long-term. Since 2013, education expenditure has been outpacing income growth for households and China government is now concerned that this may affect social equality and stability with more Chinese youths choosing to “lie flat” – a sign of the intense social competition that people are tired of and want to escape from. As education accounts for only 4% of GDP, it seems doable for the Chinese government to intervene directly and force these after-school tutoring/ private education companies to register as non-profit. The negative sentiment and concerns that the crackdown will spill over into other sectors such as Healthcare and Technology escalated quickly, and it was extreme panic. The oversold situation in Hong Kong was like in 2015 when the China market crashed due to policies, and the oversold situation in Tencent was like in the 2008 financial tsunami.
The steep sell-off seems to be a shock to the Chinese government as regulators quickly stepped in to recommit its support for small and medium enterprises to access the capital market while Xinhua News Agency commented that the regulations on tech platforms and off-campus training institutions are aimed at healthy development. Although it remains unclear if the regulatory crackdown will extend to other industries which increases the risk premium, it is important to hold a longer-term view on China since its GDP growth remains the highest across all the big economies and is the melting pot of thematic growth across all the key trends such as renewables, healthcare and digitization.
Chart Of The Week
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