Strategy Dashboard:
Confidence Boost
Q4 – October 2024
Chinese policymakers have at long last reached their pain point. A coordinated blitz of stimulus announcements were made by numerous government agencies in late-September. These ranged from well-articulated, to purposely vague, to completely opaque in nature. Investors did not wait for further elaboration, with the MSCI China Index rallying over 33% (in $CAD terms) in the two weeks following the initial communication from the People’s Bank of China (PBoC). Now that the “shock and awe” phase has subsided, we can catch our breath and examine what this policy pivot means for both the Chinese and global economies, and what investment implications can be drawn.
For starters, it’s helpful to review how we got to this point. A series of government crackdowns on domestic industries, combined with much more restrictive and longer-lasting COVID public health measures than almost any other nation, have taken a significant toll on the economy. Per the chart below, the focal point has been the Chinese property sector, which has been reeling for several years since a campaign against excessive borrowing brought major developers to the brink of bankruptcy. The property slump has weighed on aggregate wealth, with housing being the prized asset in many Chinese households. The string of self-inflicted economic wounds has badly damaged confidence in China for consumers and businesses alike.
Until recently, Chinese policymakers had opted for marginal “tweaks” instead of meaningful stimulus implementations. Hopes were that the economy would stabilize without re-incentivizing the same type of debt-fueled speculative behaviour that led to crackdowns in the first place. But with deflationary pressures mounting and growth faltering, the government has clearly become concerned about a self-reinforcing downward cycle. That does not mean that caution is now being thrown to the wind. The desire to discourage speculation and avoid a boom/bust cycle remain and will shape the target and composition of forthcoming fiscal stimulus initiatives.
While the lack of concrete details on a fiscal package have stolen the headlines recently and put a halt to the rally in Chinese stocks, the signal from the government remains clear. Cuts have been made to multiple key interest rates and the banking reserve requirement ratio (RRR). Measures to directly support the property and stock markets include the implementation (or announcement) of a mortgage rate cut, down payment ratio relaxations, swap facilities, a possible stock stabilization fund and a relending program to encourage share buybacks. Bank recapitalization plans and a debt ceiling increase for cash-strapped local governments are also in the works. The list goes on. The multi-faceted, multi-agency onslaught clearly demonstrates a sea change coming from the highest level of government.
But this will not be a repeat of the infrastructure spending binge that catapulted China’s economy out of the Global Financial Crisis in 2008-2009. Therefore, the asset classes and segments of the economy that perform strongly are likely to differ from that period. This time around, we see considerable upside stemming from a recovery in Chinese consumer demand for goods and services, as confidence slowly returns to the market after a prolonged period of excess saving. While a domestic consumption upturn would not supercharge demand for raw materials (à la 2008-2009), it would still carry a pro-cyclical global growth impulse. Having the world’s second largest economy and consumer market on more solid footing should help the current global expansion broaden out. This means that foreign investors still weary of investing in China should enjoy firming corporate earnings in pro-cyclical sectors outside of the nation as well.
CASH AND CURRENCIES
Continued rate cuts from the Bank of Canada have reduced the attractiveness of holding cash. However, cash remains a viable portfolio hedge against equity risk, particularly as long-term bonds have an unfavourable risk/reward profile. Cash has been kept below benchmark in client portfolios, but has been increased this quarter.
BONDS
Corporate bonds in most markets are trading on tight spreads (relative to history) versus government bonds. However, spreads should be supported by solid economic underpinnings, improving liquidity conditions and a likely boost to risk appetite. We remain overweight corporate bond exposure in the US and emerging markets this quarter.
EQUITIES
The initiation of the Fed rate cutting cycle and meaningful monetary and fiscal stimulus in China should provide a boost to growth and investor sentiment. We expect the equity rally to broaden out across countries and sectors; supported by improving corporate earnings. Equity exposure is overweight and has been increased modestly in client portfolios.
OPPORTUNITIES
Fed rate cuts may be doubly-beneficial for gold miners; lowering the opportunity cost of owning gold and loosening corporate financial conditions simultaneously. Relatively sticky inflation and the potential for downwards pressure on the trade-weighted US dollar would be a positive environment for gold prices. Gold mining stocks have been initiated in balanced strategies and added to in growth strategies this quarter.
Disclaimers:
Nothing herein is or shall be deemed to constitute investment, research, tax, financial, or legal advice, nor an opinion or recommendation regarding any products, strategies, or any security in particular or the appropriateness of any investment. Nothing contained in these materials is, or should be construed or used as, an offer, a solicitation of an offer, or an invitation to buy or sell any security, investment, fund, or financial product or instrument, or an endorsement, recommendation, or sponsorship of any entity or security cited or to adopt any particular investment or portfolio strategy. This material contains general information only and does not have regard to the specific investment objectives, financial situation, risk profile, or the particular needs of any specific person who may receive these materials. These materials are not intended for distribution in any jurisdiction where such distribution would be contrary to law. It is your responsibility to inform yourself of, and to observe, all applicable laws and regulations of your relevant jurisdiction. Unless we provide express prior written consent, no part of these materials should be reproduced, distributed, or communicated to anyone else. The information herein does not provide a sufficient basis for an investment decision and Forstrong Global Asset Management Inc. (“Forstrong”) makes no representation as to the suitability of any investment described herein. Investors should assess as to whether the information is appropriate in their individual circumstances and should consult with their own investment, tax, financial, and legal advisors before making any investment decisions. Investors should also carefully consider any risks involved. Forstrong does not hold itself out to be an advisor in these circumstances, nor do any of its representatives have the authority to do so. Unless otherwise indicated, all monetary figures are expressed in Canadian dollars. Investing involves risk, including possible loss of principal.
The information contained in these materials is for general informational purposes only and is intended to provide only brief comments on broad market, industry or sector trends, or other general economic or market conditions. It is not intended to provide an overview of the terms applicable to any products or funds managed or sponsored by Forstrong. Views expressed regarding a particular company, security, industry, investment, or market sector are the views only of that individual as of the time expressed and do not necessarily represent the views of Forstrong or any other person in the Forstrong organization. These materials contain information and views as of the date indicated and such information and views are subject to change at any time without notice, based upon market and other conditions, and Forstrong disclaims any and all responsibility to update such information and views. These views are not and may not be relied upon as investment advice and, because investment decisions for a Forstrong fund or product are based on numerous factors, are not and should not be relied upon as an indication of trading intent on behalf of any Forstrong fund or product. Any opinion or assumption may contain elements of subjective judgment and are not intended to imply, nor should be interpreted as conveying, any form of guarantee or assurance by Forstrong of any future action or performance. Neither Forstrong nor any of its affiliates, businesses, or representatives make any representation or warranty, express or implied, as to the accuracy, reliability, completeness, appropriateness, or sufficiency for any purpose of any information contained herein. Forstrong and its affiliates and related entities disclaim any and all liability relating to the information herein, including, without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, the information. Forstrong and its affiliates and related entities are not liable for any errors or omissions in any information herein or for any loss or damage suffered, whether direct or consequential, resulting from the use of these materials.
The information contained in these materials is strictly for general illustrative, educational, or informational purposes, and is not intended to provide legal, investment, accounting, or tax advice, and should not be relied upon in that regard. These materials contain information and views as of the date indicated and such information and views are subject to change at any time without notice, based upon market and other conditions, and Forstrong disclaims any and all responsibility to update such information and views. These views are not and may not be relied upon as investment advice. Any opinion or assumption may contain elements of subjective judgment and are not intended to imply, nor should be interpreted as conveying, any form of guarantee or assurance by Forstrong of any future action or performance. Neither Forstrong nor any of its affiliates, businesses, or representatives make any representation or warranty, express or implied, as to the accuracy, reliability, completeness, appropriateness, or sufficiency for any purpose of any information contained herein. Forstrong and its affiliates and related entities disclaim any and all liability relating to the information herein, including, without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, the information. Forstrong and its affiliates and related entities are not liable for any errors or omissions in any information herein or for any loss or damage suffered, whether direct or consequential, resulting from the use of these materials.
Any specific companies, issuers, funds, ETFs, or indices mentioned are for illustrative or educational purposes only and are not and shall not be deemed to be a recommendation to buy or sell any securities. Any companies, issuers, funds, or ETFs mentioned do not necessarily represent current or future holdings of any Forstrong funds or products. Any strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
Commissions, fees, and expenses may be associated with investments in Forstrong funds, ETFs, and/or other investment products. Please read a fund’s offering memorandum or ETF’s prospectus, as applicable, which contains detailed information, and speak to an advisor before investing. Funds and ETFs are not guaranteed, their values change frequently, and investors may experience a gain or loss. Past performance may not be repeated.
Certain statements in these materials may contain forward-looking statements or forward-looking information that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “plans”, believes”, “estimates”, and similar forward-looking expressions or negative versions thereof. Such forward-looking statements are based on current expectations and projections about future general economic, political, and other relevant market factors, such as interest, and assuming no changes to applicable tax or other laws or regulations. Expectations and projections about future events are inherently subject to, among other things, risks and uncertainties, some of which may be unforeseeable and, accordingly, may prove to be incorrect at a future date. Forward-looking statements are not guarantees of future performance, and actual events could differ materially from those expressed or implied in any forward-looking statements. A number of important factors can contribute to these differences, including, but not limited to, general economic, political, and market factors in Canada and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, and catastrophic events. You should avoid placing any undue reliance on forward-looking statements. Past performance is no indicator of future performance and the materials are not intended to forecast or predict future events. Forstrong disclaims any and all responsibility to update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as specifically required by law.
The index returns are shown for illustrative or informational purposes only. Indexes are unmanaged, and index performance does not include the impact of fees, commissions, and transaction costs and expenses that would be payable by investors in investment products that seek to track an index. Such costs would lower performance. It is not possible to invest directly in an index. Past performance does not guarantee future results. Index performance does not represent actual fund performance.
These performance statistics represent the results of Forstrong’s hypothetical model performance data for the relevant time period, which are calculated from the application of proprietary investment strategies as set by Forstrong’s Investment Committee. These performance statistics do NOT reflect the performance of any actual Forstrong fund, product, or account. Model performance results have inherent risks and limitations because they are hypothetical and do not represent actual trading and do not reflect the deduction of any fees or expenses except as specifically noted below. As a result, the performance results reflected herein are estimates only and may be based on incomplete information. Actual performance of any portfolio, fund, or account following similar strategies may vary materially from the performance shown herein, including, but not limited to, due to client-specific portfolio differences with respect to size, inflow/outflow history, inception dates, market conditions, and/or other factors. Performance numbers do not reflect any trading or transaction costs, taxes, and management and advisor fees that would be associated with actual management of and trades made for a fund or account. Such costs would lower performance, including as a result of compounding. The performance data of the underlying portfolio investments, comprised of third party ETFs, are net of the total expense ratios of such ETFs. The performance returns assume reinvestment of all dividends and/or other earnings. The trading prices for securities in the model may differ from trading prices in actual clients’ portfolios. Forstrong may not have been actually able to trade at the price used for a given security in the model portfolio. Any expenses deducted are estimates only and may or may not be the same as those attained in an actual portfolio.
Performance results assume model portfolios to be fully invested in securities, while actual client accounts may hold excess cash for liquidity purposes. Therefore, the model may have better results than actual results in rising markets and poorer results in falling markets All statistics and results presented are unaudited. Past investment results provide no indication of future performance. Future returns are dependent on the general financial investment environment, the nature of the strategy mandate, and active investment strategies and risks. Returns for periods over one year are annualized. The data used to calculate model performance was obtained from sources deemed reliable and then organized and presented by Forstrong. However, such information has not been independently verified by Forstrong (and Forstrong disclaims any obligation to verify) and Forstrong does not guarantee its accuracy or completeness and accepts no liability for any loss or damage suffered, whether direct or consequential, resulting from its use. Unless otherwise indicated, all performance data is calculated and presented in Canadian dollars.
The information contained herein is presented solely for illustrative purposes and should not be construed as a forecast or projection. While some information used herein has been obtained from various published and unpublished third-party sources considered to be reliable, such information has not been independently verified by Forstrong (and Forstrong disclaims any obligation to verify) and Forstrong does not guarantee its accuracy or completeness and accepts no liability for any loss or damage suffered, whether direct or consequential, resulting from its use. It should be noted that data provided may be approximate numbers.
Forstrong Global® and the Forstrong Global® logo are trademarks or registered trademarks of Forstrong Global Asset Management Inc. in Canada.
© 2024 Forstrong Global Asset Management Inc. All rights reserved.