Are China's fiscal stimulus measures starting to pay off?

On the latest edition of Market Week in Review, Adam Goff, managing director, investment practice, and Sophie Antal Gilbert, head of AIS business solutions, discussed the latest read on the U.S. economy. They also dug into Chinese manufacturing activity and MSCI’s announcement that it will increase China’s weighting in its Emerging Markets Index over the next several months.

Q4 GDP report shows continued strength in U.S. economy

Recently-released data by the Commerce Department showed that the U.S. economy logged a GDP (gross domestic product) growth rate of 2.6% during the fourth quarter of 2018, Goff said. Within these numbers, measures of business spending and consumer confidence appeared to hold up fairly well, he noted—signaling there’s no immediate economic crisis brewing.

The Institute for Supply Management’s PMI® (Purchasing Managers’ Index) reading for February, released March 1, came in at 54.2—weaker than expected, but still indicative of expansionary conditions, Goff said. “Collectively, what we’re seeing in these numbers is a slowing U.S. economy—but one that’s not teetering on the edge of collapse,” he stated. With this in mind, Goff believes there’s no short-term risk of a U.S. recession.

PMI surveys point to increasing domestic manufacturing demand in China

With the U.S. economic outlook stabilizing, most of the attention among market watchers has shifted to China, Goff remarked. The world’s second-largest economy, which saw a significant drop in manufacturing levels during the latter half of 2018, has since embarked on a series of fiscal stimulus measures in order to combat slumping economic growth. The key question among many, Goff said, has been to what degree these measures will boost actual economic activity in China.

Recent manufacturing surveys suggest these efforts may be having a slightly positive impact, he noted. “The official PMI survey from China, released Feb. 27, was overall a little unimpressive, with a reading of 49.2—slightly on the contractionary side,” Goff said. However, digging further into the numbers, there are signs that domestic manufacturing and domestic orders are picking up, he added. “This suggests that the Chinese government’s fiscal stimulus is starting to come through,” Goff stated, pointing out that the privately-run Caixin/Markit Manufacturing PMI for February came in slightly higher, at 49.9. “Any reading at 50 or above typically indicates expansionary conditions, so this suggests that a boost in domestic demand is helping to counteract China’s weak export numbers,” he explained.

MSCI decision: Big step forward for China’s stock market

On Feb. 28, index provider MSCI announced plans to increase its country weighting for China in its benchmark Emerging Markets Index, Goff said. “This may be the most significant event for markets in the past week,” he noted, “as it’s a big step forward in the long progression of Chinese A-share markets from being essentially un-investable for institutional investors to becoming a mainstream market that’s part of mainstream indexes.”

MSCI first dipped its toe in a few years ago, including China’s A-share market at a 5% inclusion factor—which resulted in a less than 1% weighting in the Emerging Markets Index, Goff said. The latest move will increase the inclusion factor to 20% by November, which will result in an approximate 3.5% weighting of Chinese large-cap stocks in the index, he explained.

“This is a sign that the Chinese market is reaching a level of respectability in terms of governance, regulation and oversight—and that it’ll likely become a major part of world markets for years to come,” Goff concluded.