After 2 months of underperformance, both Hong Kong and China markets mounted a huge rebound in November, expectations on additional policy support and COVID policy relaxations drove the rapid improvement in investment sentiment. Over the month of November, CSI 300 was 9.81% higher (13.11% in US$ terms), the Hang Seng Index even surged a whopping 26.62% (27.31% in US$ terms).

Economic data this month continued to disappoint, as all PMIs and sector indicators showed continued weak trends. The economic slowdown in China due to confidence issues, which could be attributed to 2 main causes, the COVID restrictions due to the ‘Zero COVID’ doctrine, and the property crisis after active deleveraging. The former has dampened both investment and consumption due to the strictness of the rules, while the latter has large direct and indirect impacts on the economy itself, and further hits disposable income due to the reverse wealth effect.

To deal with the issues, the Chinese government has finally relaxed COVID restrictions. Although the relaxation is relatively limited in scale, it was viewed as a step forward to reopening. Optimism over the COVID policy outlook lifted economic expectations, which could possibly kick-start consumption recovery. Regarding the property crisis, a 16 point plan was released, providing more financing support to the sector, potentially limiting the contagion risk in the economy. With the government starting to address the core issues of the economy, the medium term outlook for Chinese equities would likely start to turn more positive, we hold a relatively neutral view after the recent surge, and see more upside available if the market corrects.

Although the overall economy continued to slowdown, and inflation remains elevated, the global investment market continued the strong rally on the back of optimism over monetary policy tightening. Over the month of November, the Dow, S&P 500, and the NASDAQ gained 5.67%, 5.38%, and 4.37% respectively.

Investment sentiment was buoyed by dovish expectations, although fundamentals have not shown much improvement over the previous month. In our view, while a slowdown in the pace of rate hikes is likely, it shouldn’t mark a pivot in the monetary policy. We still consider inflation elevated, even Fed’s preferred measure of core PCE is far higher than the target level, there is insufficient grounds for a near term pivot until the figures are low enough. With interest rates remaining at high levels, expect continued pressure on both the economy and the stock market.

Given the weak economy and high inflation, ‘soft landing’ is not our base case for 2023. Recession is possible, expect corporate earnings to take a further hit, driving equity markets lower. Even if the economy does manage to achieve a ‘soft landing’, current valuations are relatively unattractive considering the conservative estimated terminal risk free rate of 5% in 2023, the ongoing quantitative tightening progress will also put a cap on valuation in the equity market. Therefore, despite the recent rebound in the market based on optimism, we do not think it is sustainable, and would remain conservative on US equities before market reflects the downside risks appropriately.

​ ​US

US markets saw higher volatility ahead of the much anticipated Fed meeting, the 3 major equity indices were down 1.71-2.45% over the past 5 days ending Thursday. The US Federal Reserve concluded the monetary meeting on Wednesday, announcing a 50 bps hike as markets have expected. President Jerome Powell mentioned that there is still ‘ways to go’ on fighting inflation, citing the tight job market as one of the issues at hand. The updated Fed Dot Plot also showed members turning slightly more hawkish, with the median rate expectations for 2023 pushed higher from 4.50-4.75% in September to 5.00-5.25%. However, markets seems to be at odds with Fed projections, at the time of writing, interest rate futures suggest rates to peak in June, and rate cuts to take place in the second half of 2023, and rates to end the year at the 4.5% level.

As for the economy, retail sales in November contracted 0.6% MoM, which was worse than the market expected 0.1% contraction. Industrial production also contracted 0.2% MoM, lower than the expectations of a flat figure. CPI figures on the other hand continued to show signs of easing, as the November headline CPI was 7.1% YoY, lower than both the market expectations of 7.3% and the October figure of 7.7%. Core CPI also showed a similar trend, down to 6.0% YoY in November, and was lower than both market expectations and the previous month figure. However, the labour market continues to show tightness, with the latest initial jobless claims falling to 211K. Next week, the US will be releasing further data including durable goods for November, as well as University of Michigan Sentiment Index and Consumer Board consumer confidence index in December, alongside the usual high frequency labour market data.

 ​Europe

European markets edged lower, with the UK, French, and German indices losing 0.62-1.95% over the past 5 days ending Thursday. The ECB held their monetary meeting on Thursday, announcing a rate hike of 50 bps. ECB President Chirstine Lagarde rejected prospects of an ECB pivot, and stated that markets should expect the Bank to raise rates ‘at a 50 bps pace for a period of time’, until monetary conditions are sufficiently restrictive. The ECB also discussed plans on Quantitative Tightening in 2023, which would likely start from March at the pace of around 15 billion Euros per month. The Bank of England also held their monetary meeting on Thursday, raising rates by 50 bps as expected. Governor Andrew Bailey stated that inflation might have peaked, and the UK has already entered recession, lowering expectations on the terminal rate. As for economic fundamentals, the German ZEW economic sentiment was -23.3 is December, which was slightly better than the expected -26.4. The UK CPI in November eased to 10.7% YoY, which was lower than expected and first retreat from the peak of 11.1%. Next week will be a quiet week on data, with Germany releasing the IFO business climate index for December, and Eurozone to release the latest consumer confidence in December.

​China

While China continued to ease COVID restrictions, there are worries over a possible surge in cases. Over the week, the CSI 300 was down 1.10%, while the Hang Seng Index was 2.26% lower. Chinese vice Premier Liu He stated that new measures are being considered to support the property sector, and to rebuild market confidence. Over in Hong Kong, Chief Executive John Lee believes that the Mainland China Border reopening will likely happen in 2023. On the economic front, Chinese data continued to disappoint. Industrial production in November was 2.2% YoY, missing market expectations of 3.5%, retail sales in November contracted 5.9% YoY, which also missed estimates of a 4% contraction. Fixed asset investments YTD were 5.3% YoY, which is lower than both market expectations and the previous value. Next week will be a quiet week for Chinese data, with the 1 Year and 5 Year Loan Prime Rates (LPR) as the only releases worth watching, both are expected to remain unchanged.

​ ​US

US equities retreated over the week as concerns over the economy and inflation re-emerged. Over the past 5 days ending Thursday, the 3 major indices were 1.78-3.49% lower. The correction in the market could be partially attributed to the reignited worries over the economy and labour market. 10 year treasury yields briefly fell as low as 3.4% as tensions over Ukraine went higher. However, at the time of writing, market base case expectations for the upcoming monetary policy path has remained largely unchanged, with Bloomberg interest rate futures suggesting that markets have priced in a 50 bps hike for the December meeting, and the terminal rate in 2023 would not be higher than 5%. US Fed officials entered the traditional blackout period this week ahead of the FOMC meeting next week, but economic data surprises continued to raise uncertainties over the monetary outlook.

As for the economic data, factory orders grew 1.0% MoM in October, which was better than both the market expected 0.7%, and the September figure of 0.3%. Labour market data on the other hand continued to cool down, as initial and continuing jobless claims figures continue to climb higher, which will remain a key matrix for markets to keep an eye as we close in to the Fed meeting. Next week, the US will continue to release the flurry of economic data, including the November data on retail sales advance and industrial production, as well as the much watched November CPI data. Preliminary data on December manufacturing and services PMIs will also be released, alongside the usual high frequency data of initial and continued jobless claims. The US Fed will also hold its FOMC meeting next week.

 ​Europe

European markets slipped lower over the week, the UK FTSE, French CAC, and German DAX lost 1.14-1.58% over the past 5 days ending Thursday. The war in Ukraine continued to bring uncertainty to the market, as Russian President Vladimir Putin warns that a nuclear escalation is possible. Cyprus Central Bank Governor Constantinos Herodotou sees interest rates close to neutral at the moment, but admitted that more hikes might be needed. Slovakian Central Bank Governor Peter Kažimír held a more hawkish stance, stating that a 10% inflation was still too high and shouldn’t warrant a slowdown in rate hikes. As for the economy, retail sales fell 2.7% YoY in October, which was worse than expected. German industrial production on the other hand was better than expected, only recording a slight fall of 0.1% MoM in October. Next week will be data heavy, Europe will be releasing preliminary PMI data on both manufacturing and services sectors for December, Germany will release the ZEW survey expectations and current conditions for December, and the UK will release the much anticipated CPI figures for November. Other than that, both the ECB and the BOE will hold their monetary meetings in the middle of the week

​China

On the back of improving policy outlook in China, both China and Hong Kong equity markets performed well over the week. The CSI 300 index is up 3.29%, while the Hang Seng Index continued the strong form and ended the week with a 6.56% gain. To further support the economy under pressure, the Chinese government has the ’new 10 rules’ aimed at easing COVID restrictions, including easing on testing, quarantine, and health code usage. The Politburo meeting also sent out signals of shifting away from the ‘dynamic zero’ policy. Furthermore, it was rumoured that China will roll out further support measures towards the property sector in the coming week. As for the economy, Caixin Services PMI for November came in at 46.74, which was lower than market expectations and remains in contraction. Exports fell 8.7% YoY ion November, which was the largest fall since March 2020 and marks the first drop in over 2 years. PPI extends the fall at 1.3% YoY in November, and CPI remains under control at 1.6% YoY. Next week, China will also be releasing other economic data for November, including industrial production, property sales, retail sales, and fixed asset investments.

​ ​US

US equity markets had a lukewarm week following the Thanksgiving holidays. Over the past 5 days ending Thursday, the 3 major indices were 0.59-1.75% higher. US Fed President Jerome Powell spoke in public this week, stating that smaller rate hikes are likely and could start soon, though he admits that the fight against inflation still has a long way to go, and reiterated that the focus is on how high will the terminal rates be, and how long rates will remain restrictive. St. Louis Fed President James Bullard suggests that there will be more rate hikes down the line, and suggests that the Fed should keep interest rates above 5% throughout 2023, while New York Fed President John Williams also agrees that more work is needed from the Fed to bring inflation down. At the time of writing, Bloomberg interest rate futures suggest that markets are pricing in a 50 bps hike in December, and Fed fund rates would only peak around 4.8% next year.

The Fed also released the latest Beige Book on Wednesday. The report found that housing market was hit due to high interest rates, inflation, and recession risks, it was also noted that there is a slowdown in the overall economy, with layoffs observed in the housing, finance, and technology sectors. As for the economy, ISM manufacturing index came in at 49 in November, which fell below market expectations of 49.8, and marked the first contraction since June 2020. Conference Board Consumer Confidence was 100.2 in November, better than the market expected 100, but was still lower than October’s 102.5. Labour market continued to show mixed signals, initial jobless claims were lower, but continuing claims continued the growing streak since late September. Next week, the US will release factory orders data for October, University of Michigan sentiment index for December, as well as the latest labour market data including initial and continuing jobless claims.

 ​Europe

European markets had a slight consolidation after the recent weeks of rally, over the past 5 days ending Thursday, the UK FTSE and the French CAC gained 1.23% and 0.70% respectively, while the German DAX was down 0.34%. EU members continued their discussion on further restrictions on Russian oil, where a price cap of $60 per barrel is being discussed, the price cap would work in conjunction with the oil sanctions with the aim off lowering oil revenues to Russia. As for economic fundamentals, the inflation data was a centre of attention this week, as the November CPI of the Eurozone came in at a surprising 10.0% YoY, which was lower than both the market estimates of 10.4% and October’s 10.6%. Eurozone economic sentiment for November was 93.7, which was better than the market expected 93.5, and also marked the first MoM improvement since February. Next week, Europe will be releasing the October retail sales YoY data, and Germany will release the industrial production data.

China

Hong Kong and China markets continued to perform on back of improving market sentiment over policy directions. Over the week, the CSI 300 index gained 2.52%, while the Hang Seng Index surged 6.27%. Local authorities including Guangzhou and Beijing have started to show some easing on COVID restrictions, and there has been more emphasis on vaccinating the elderly. Markets anticipate that a policy pivot could be on the table, alongside with the continued support on the property sector, reopening beneficiaries and Chinese property developers surged in response to the news. As for economic fundamentals, both NBS official manufacturing and non-manufacturing PMIs in November were disappointing, missing both the market expectations and showed further contraction compared to the previous value. The November Caixin manufacturing PMI on the other hand showed a positive surprise of 49.4, which was better than both market expectations and the previous month value. Next week, China will release more economic data, including the November data on Caixin services PMI, exports YoY, PPI and CPI data, as well as aggregate financing and new Yuan loans.

​China

Hong Kong and China markets continued to perform on back of improving market sentiment over policy directions. Over the week, the CSI 300 index gained 2.52%, while the Hang Seng Index surged 6.27%. Local authorities including Guangzhou and Beijing have started to show some easing on COVID restrictions, and there has been more emphasis on vaccinating the elderly. Markets anticipate that a policy pivot could be on the table, alongside with the continued support on the property sector, reopening beneficiaries and Chinese property developers surged in response to the news. As for economic fundamentals, both NBS official manufacturing and non-manufacturing PMIs in November were disappointing, missing both the market expectations and showed further contraction compared to the previous value. The November Caixin manufacturing PMI on the other hand showed a positive surprise of 49.4, which was better than both market expectations and the previous month value. Next week, China will release more economic data, including the November data on Caixin services PMI, exports YoY, PPI and CPI data, as well as aggregate financing and new Yuan loans.

The border reopening was welcomed, and the market was further lifted by the improved global investment sentiment, Japanese equities posted modest gains. Returns however were affected by the continued depreciation of the Japanese Yen, over the month of October, the Nikkei 225 gained 6.36% (3.56% in US$ terms), while the TOPIX was up 5.09% (2.33% in US$ terms).

The latest inflation figure in Japan came in at 3%, the highest level in recent years, and remains a notch above the central bank target. One of the major causes was imported inflation, as the weak Yen has fallen 22.60% against the Dollar since the start of the year. Although household spending had continued to grow, alongside headline wages, the figures were also partially propped up by the higher inflation figures, where we see real wages in negative territory, we expect domestic consumption to remain under pressure with elevated inflation.

Despite the falling Japanese Yen and higher inflation, the Bank of Japan has reiterated that the dovish monetary policy will continue to support the economy. Instead, the current Prime Minister Fumio Kishida plans to tackle inflation via economic stimulus. The Cabinet has approved a stimulus package of around 39 trillion JPY, which could alleviate the impact of high inflation on households, in turn supporting the real economy. Moreover, the further border reopening has also provided a boost to the economy. Overall, we remain neutral on the Japanese equity market in the short term as the positive drivers are balanced out by the risks in inflation and weak currency.

​ ​US

The US markets had a shorter week with Thanksgiving, market sentiment remained positive as the focus remained on the likelihood of rate hikes slowing down. Over the past 5 days ending Wednesday, the 3 major indices gained 0.91-1.91%. The US Federal Reserve released their November FOMC meeting minutes on Wednesday, minutes showed that officials were inclined to dial down on rate hikes, and some members were also concerned about the delayed impact of rate hikes on the economy and inflation. However, members also noted that the terminal rates would likely be higher than previously expected, and they warned of a ~50% chance of recession happening. Markets focused on the reconfirmation of slower rate hikes and posted continued gains. At the time of writing, Bloomberg interest rate futures data showed that markets expect the Fed to hike rates for 50 bps at the December meeting, and rate would peak around 5% mid next year.

The Institute of International Finance (IIF) published the latest forecast for the global economy, suggesting that global growth in 2023 could further slow to 1.2%. IIF suggested that the largest drag factor will come from the Ukraine conflicts, while positive drivers would come from China. On the economic fundamentals front, manufacturing PMI for November came in at 47.6, much lower than the market expected 50.0 and 50.4 In October, it also marked the first contraction since the height of the COVID pandemic back in 2020 July. Services PMI for November of 46.1 also came in lower than market expectations and the previous month figure. Labour market data continued to show signs of easing, with initial and continuing jobless claims coming in higher than both market estimates and the previous reading. Next week, the US will be releasing November data on the latest Conference Board Consumer Confidence Index, ISM manufacturing PMI, as well as nonfarm payrolls data.

 ​Europe

European markets performed in line with global markets, over the past 5 days ending Thursday, the UK, French, and German indices were up 1.63-2.00%. The ECB just released their October interest rate meeting minutes on Thursday, minutes revealed that while most members agreed that a shallow recession would not be enough to bring down inflation, there is disagreement on the size of hikes, with some calling for a 50 bps hike instead. Regarding the energy crisis, members remained split over the gas price cap, ministers will meet again in mid-December. On the economic front, Eurozone PMIs were better than expected, with manufacturing and services PMIs coming in at 47.3 and 48.6 respectively, both beating market estimates, though they remained below 50. The UK PMIs were in a similar position, it remained in contraction, but the November figures beat market estimates nevertheless. Next week, the Eurozone will publish the latest Economic sentiment data for November, as well as the preliminary CPI figures. It was also reported that European Council President Charles Michel will visit China on 1^st December.

​China

China and Hong Kong equity markets paused after the recent rallies, the CSI 300 index was slightly down 0.68% this week, while the Hang Seng Index is down 2.33%, the Hang Seng Tech index fell further, dropping 6.48% over the period. COVID cases continued to surge in China, with daily infection figures hitting a record high, markets continue to look for clues for China’s possible pivot on the COVID policy. Regarding the property sector crisis, Chinese banks including ICBC and others pledged support to provide financing to certain troubled developers, totaling up to 1.28 trillion CNY, the news lifted the property sector in anticipation of further support from the government. However, the loan prime rate was left unchanged this week. In other news, some hedge fund managers claimed that they opened bets against the Hong Kong Dollar peg. China will be releasing a lot of economic data next week, including both NBS official manufacturing and non-manufacturing PMIs for November, Caixin manufacturing PMI in November, and industrial profits YTD YoY for October.

Apart from China as the outlier, global markets including EM equities recovered in October. Investment sentiment improved on the back of hopes that monetary tightening will ease, commodity exporters were further buoyed by the resilient commodity prices. The MSCI EM index was down 3.15% in October mainly due to China, while the MSCI LATAM index was 9.59% higher.

Although there has been a large rebound in global markets, all the existing risk factors have remained pretty much in place. Global inflation stays elevated, we see no case for monetary policy tightening to stop or pivot in the short term, which will pressure both the real economy via higher financing costs and the investment market on valuations. The existing trend of the strong Dollar is another negative factor for the EM market, together with the risk adverse sentiment, we expect capital flows to stay unfavourable for EM relative to DM.

Certainly, there are also outliers in EM equities, such as Brazil, which had a relatively strong performance this year. As a big commodity exporter, Brazil had benefitted from the stronger currency and higher commodities prices, inflation in the country has also significantly eased. However, there are uncertainties and risks after former President Lula won the latest election. Concerns over his social spending plans and risks in fiscal integrity could lead to falling confidence and capital outflows, creating risks for potential downside in the market. Given no change in the risks overall, we remain conservative over EM equities and would suggest investors to stay on the side-lines in the short term.

After 2 months of larger corrections, although major risk factors of recession and energy crisis has not faded, European markets mounted a comeback, market sentiment improved on the back of optimism over future monetary policy. Over the month of October, the European STOXX 600 index gained 6.28% (7.33% in US$ terms).

Inflation remains unresolved, not only did the headline figure soar as the Eurozone CPI further rose to 10.7% YoY and hit a record high in October, the core CPI figure also hit a new high and showed no signs of easing.  While the ECB held raised rates by 75 bps late in October as expected, ECB President Christine Lagarde admitted that inflation remains too high, and rates would needed to be further raised to ensure expectations remain anchored. Even as the Bank refused to offer guidance on future policy direction, we believe monetary tightening will continue, and the market is too optimistic over the monetary path, and the continued hiking should put pressure onto investment markets.

Other than monetary policy pressures, risk factors arising from other sources have remained unchanged over the month. Fundamentals remain weak, confidence also stayed at trough levels as concerns over the Ukrainian situation, energy security, and soaring inflation dented consumer and corporate sentiment. With the risks of economic recession imminent, energy crisis remained unresolved due to the situation in Ukraine, and an expected extension of the monetary tightening due to sustained inflation, we maintain our underweight call on European equities before the risk factors dissipate.

Market sentiment was muted as policy guidance missed expectations. Economic fundamentals remained weaker, the Chinese equity market extended losses and saw larger corrections in October. Over the month, the CSI 300 Index fell 7.78% (10.17% in US$ terms), while the Hang Seng Index had one of the worse months in history, crashing 14.72% over the month (14.72% in US$ terms).

The economy showed further weakness, with all major PMIs falling into contraction zone again. Other sector indicators showed a similar trend, industrial production and retail sales alike remained below the long term average levels, while the property crisis remains unresolved. The key issue at hand is the lack of confidence in both the consumer and business ends, no amount of monetary easing and policy posturing can reverse the situation. We expect the crisis to exert significant pressure onto the economy, and there will be no significant recovery in the short term.

Apart from the property crisis, the COVID situation in China dampens confidence, restrictions have resulted in a higher propensity to save. Furthermore, the 20th National Congress left markets with little to be excited about. There has been more emphasis on ‘security’ and less on ‘economy’ and ‘reforms’,  President Xi has also reiterated the commitment to ‘Zero COVID’, the economy might take a backseat in the coming years, and expect limited change in the policy direction. Henceforth, we expect the existing economic issues to stay. Although current valuation levels remain at historic lows, it only offers some downside protection, but valuation recovery would still depend on tangible policy pivots from China. We would remain wait-and-see on China in the shorter term.