Author: David Chao (Global Market Strategist, Asia Pacific)
Asian equities traded sideways last week only up +0.2% despite strong Q1 Chinese GDP (+6.4%) and USA retail sales (+1.6%) data as investors seem to have already priced in the strong macro-level growth recovery. As stated in our note last week, fiscal and monetary stimulus by the Chinese government has been materializing in the economy earlier than expected and there no longer remains a risk that the government’s targeted GDP growth of 6.0-6.5% for 2019 will be missed.
The strong Chinese Q1 GPD growth has brought a recent shift in the government’s policy focus – with the Politburo indicating last week that the focus will shift to growing the economy through structural reforms rather than economic stimuli. Specifically, the Politburo decided to no longer include the phrase “stabilize employment, the financial sector, foreign trade, investment and market expectations” from the meeting summary. In addition, the most recent PBOC monetary policy committee meeting changed the description of the status of the economy from “stable development” to “healthy development.”
Although I remain positive on both the economic growth recovery story in China and the rest of Asia, I foresee investors taking their foot off the gas pedal and taking profit at these levels as current valuations in Asian equities have pretty much discounted most of the good macroeconomic news. Near-term downside risks remain for the Chinese economy – both manufacturing output and non-Asian trade continue to be weak. In addition, the PBOC’s expansionary monetary policy, which was originally intended to provide loans to help the SME sector recover, has instead flowed in great part to the real estate sector.
Asian markets are currently supported by a near-term expectation of a resolution in the US-China trade war, and any announced deal should serve as a catalyst for a further rally across asset classes, however after this positive catalyst, a prudent recommendation would be for investors to be selective buyers of risk assets in Asia rather than aggressive index risk takers.