Two elements behind China's economic slowdown
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben discussed the latest Brexit developments, the slowdown in the Chinese economy and the outlook for third-quarter earnings season in the U.S.
Johnson, EU reach agreement on Brexit
UK Prime Minister Boris Johnson successfully negotiated a draft divorce agreement with the European Union (EU) on 17 October, setting up a critical vote in Parliament on 19 October. The agreement with the EU effectively allows UK member Northern Ireland to stay in a common customs union, and prevents a hard border with the Republic of Ireland, an EU member.
"This is the deal that I think most people wanted, but unfortunately, it doesn’t seem to be the deal that the Democratic Unionist Party (DUP) of Northern Ireland wanted," Ristuben said. He explained that the DUP, which has come out against the deal, has 10 members of parliament (MPs) - and that those 10 members are why Johnson was elected prime minster in the first place, as his Conservative party lacks a majority. In order for Johnson to make up for these lost votes, he’ll need to attract the support of 19 Labour Party MPs to get his deal approved, Ristuben added.
How it all shakes out is anyone’s guess, he said, but one thing appears clear: After three years, the broader marketplace is likely experiencing some Brexit fatigue. As evidence, Ristuben noted that when the deal was announced on 17 Ocober, global equity markets had little to no reaction.
What’s behind the growth slowdown in China?
Switching to China, Ristuben said that the country logged a 6% GDP (gross domestic product) growth rate during the third quarter - at the low end of the Chinese government’s targeted growth rate of 6.0% to 6.5%, and also the lowest growth rate reported since 1992. The report, released 19 October by China’s National Bureau of Statistics, is a recognition by the government that economic growth is slowing, Ristuben observed.
There are two elements to the slowdown, he said: Investment and consumption. "While state-owned and state-run businesses in China are continuing to invest, it’s very clear that non-Chinese foreign firms are beginning to divest from China," Ristuben remarked. Consumer spending - particularly in relation to automobile purchases - has also softened recently, he noted, due to a weakness in the country’s housing market. Overall, this slowdown is probably creating some motivation for Chinese President Xi Jinping to strike a trade deal with U.S. President Donald Trump, Ristuben said.
Outlook for Q3 earnings season
Turning to earnings season, Ristuben said that third-quarter earnings for S&P 500 companies are projected to decline -4.6% on a year-over-year basis. However, he noted that earnings from the first two quarters of the year beat consensus expectations. "If the third quarter follows suit, growth will likely end up better than expected: either flat or slightly negative," Ristuben stated. If growth does end up negative, it would make for the third consecutive quarter of declining earnings, he added.
With the season still in its early stages, Ristuben said there’s been mixed results among the banks that have reported, with some beating expectations. He noted this is likely due in part to a reduction in interest rates during the third quarter, which spurred a rebound in the U.S. housing market. Overall, however, the general tone emerging from the banking sector is less optimistic than at the start of the year, Ristuben stated.
"It’s important to understand that this doesn’t mean banks have turned pessimistic," he explained. "Rather, I think banks are recognising the detrimental impacts that trade tensions are having on the manufacturing sector - and are therefore beginning to become more concerned about these impacts potentially spreading to the consumer spending market," Ristuben concluded.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
The information on this website is only intended for use by professional clients, regulated financial advisers and intermediaries who are knowledgeable and experienced in the financial services market and in investment products of this nature. If you are a retail or individual investor then please leave this website immediately and consult your financial adviser.
You should not use this website unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that the website and investments are suitable for your client in light of their circumstances and financial position.
The information contained on this website is for information purposes only and you should not take it as constituting an offer, solicitation, inducement, commitment or invitation to subscribe for or to purchase, sell or hold any interest in any of the investments mentioned herein.
This website is not intended for distribution or use by anyone in any jurisdiction in which such distribution or use would be prohibited. Nothing on this website or in the materials referred to therein constitutes, or is intended to constitute, financial, tax, legal or other advice.
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested. Any past performance figures are not necessarily a guide to future performance.
The website may contain forward-looking statements, which are based on a number of assumptions regarding present and future business strategies, which may or may not prove to be correct. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not guarantees of future performance.
Issued by Russell Investments Limited. Company No. 02086230 and Russell Investments Implementation Services Limited Company No. 3049880. Registered in England and Wales with registered office at: Rex House, 10 Regent Street, London SW1Y 4PE. Telephone +44 (0)20 7024 6000. Authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London E20 1JN.
All reasonable care has been taken by us to ensure that the information contained on this website is accurate at the time of publication. However, we accept no responsibility for the accuracy, adequacy or completeness of the information and materials contained on this website and expressly disclaim liability for errors or omissions in such information and materials. We and our respective affiliates do not have any obligation to update the information contained in this website and reserve the right to change these terms and conditions at any time, without notice.
We will not regard you or any person who accesses this website as our client in relation to any of the investment products or services detailed therein, unless expressly agreed.