Global Eyes on China｜Steve Brice: China's economy is resilient amid weaker global growth

南方财经全媒体记者 李依农 北京报道

Amidst global challenges, China's economy stands resilient. In 2023, China's GDP exceeded 126 trillion yuan, marking a robust growth of 5.2% from the previous year. As China continues to be a driving force for global economic development, its projected 2024 GDP growth target of around 5%,  according to the 2024 Goverment Work Report, reaffirms its commitment to sustained progress.

Looking ahead to 2024, global economy is poised for evolution amid changing dynamics. In an exclusive interview with SFC, Steve Brice, Global Chief Investment Officer at Standard Chartered Bank points out, in comparison to the U.S. and Europe, China’s growth is expected to be relatively resilient.

Regarding the outlook for global capital markets, Brice emphasizes the importance of strategic diversification and prudent risk management for investors navigating the market landscape in the coming year. 

China’s Growth is Expected to be Relatively Resilient 

SFC Markets and Finance: What's your take on the projected weaker global growth this year, and what's behind it?

Steve Brice: From our perspective, we agree with the outlook for global growth to slow this year. If we look at the three major regions, we think that a key driver of that slower growth is actually going to be the U.S. economy.

If we're looking at the consumer, where we see signs of forthcoming weakness. Obviously, the recent data has been strong, but just in the big picture, we're looking at around 1.5% growth in the U.S. this year versus 2.5% last year, whereas in China, growth is expected to be relatively resilient. I'm sure we'll talk about that a bit later. 

But also in Europe, bordering on recession at the moment, unlikely to deteriorate dramatically from here. We do expect policies to come through later in the year, but unlikely to be a major driver of growth either. So, the main difference between last year and this year, in our opinion, will be slow growth in the U.S.

SFC Markets and Finance: The U.S. economy seems to be resilient last year. Why? And what’s your expectation for the U.S. this year?

Steve Brice: I guess everybody was entering 2023 expecting a recession in the U.S.. And obviously the economy held up pretty well. If we look at our recession indicators, they're still flagging risks of a recession later in the year. But our central scenario at the moment is that we'll see slower growth, but it's less likely to be a recession.

And the key thing to watch here is the investment last year was very strong. And that's likely to remain relatively strong this year as well, although election uncertainty might undermine that to some extent. But the consumer is where the key change is going to come in our opinion. So excess savings have been dwindling, down to around $400 billion now. That's still relatively healthy, of course. But that's likely to be decline more and more as we go through this year.

And we are looking at the labor market as well as everybody is, we look at the headline job numbers, it looks incredibly strong, almost booming from a labor market perspective. But if you look under the hood, I think from our perspective, we're seeing that hours worked is starting to decline quite significantly. And that's often a lead indicator of future demand for workers.

Last time we saw a report, a point two decline in the number of average hours worked. Even a point one it's actually quite material, and we've seen that starting to decline again. So we expect the labor market to weaken from pretty strong levels, but to weaken as we go through the year, and that's going to lead to sore wage growth and therefore a little less willingness to go out and spend excessively as we go through this year. So that's really where we see that slower growth coming from. 

China's Retail Sector as a Major Positive

SFC Markets and Finance: How about the China's economy?

Steve Brice: The retail sector is still a major positive for us, it's just consumers continuing to spend. That's a major driver of most economies, and China is no exception to that. We're seeing inflation still very low. That means the authorities have plenty scope to stimulate the economy, if they want to try and to help that bottom out and need strong nominal growth, which is absolutely critical to the Chinese economy.

I think it's sort of really exciting area, driving the technology chain, whether you're talking about hardware, whether you're talking about software or technological services and financial services as well. I think this is going to be absolutely critical to the success of the Chinese economy. I think it's really exciting that they are making huge progress already. Certain companies from the region are huge companies already, and we're going to see more of those developments. So from an economic perspective, it’s going to be a key driver for driving long-term growth, but also for stock market value as well and stock market investors. The region is going to be increasingly important, the Silicon Valley of China. It's very exciting. I think it's going to be good for the economy.

Positive Signs for Inflation Trends

SFC Markets and Finance: We have seen decline in inflation during 2023. Are the inflation risks diminishing?

Steve Brice: I guess there's different dynamics in different countries. From our perspective in the U.S., we obviously saw a very significant deceleration in inflation last year, that was primarily driven by goods prices coming lower. We think the baton is going to shift over to services prices this year. Obviously, the deceleration is not going to be as dramatic as we saw last year, but still drifting lower. That's a positive outcome.

In Europe the deceleration is likely to accelerate this year if that makes sense. So coming down faster from where it was. It's been sticky so far. So that's going to be a major, major driver of policy, financial markets as we go through this year.

The only caveat that we need to keep an eye on is the Middle East conflict. We've seen the Red Sea now becoming almost close to trade. And around 12% of global trade historically has gone through that route, rerouting that via the southern tip of Africa. Is obviously much more costly, takes more time, and will lead to delays in goods being delivered. If people are harking back to the COVID-19, and sort of saying our supply chain disruptions that could be really worrying. From our perspective, it's probably manageable, but it's still a risk worth watching.

For me, oil prices are the key. So far, oil prices have been very well behaved through the regional conflict. If that remains the case and then the disinflation trend continues. But if we see oil prices go up above $120 a barrel or something like that, then that would lead the market to totally reevaluate the short-term inflation outlook at least.

The Fed Will be Cautious About Rate Cuts

SFC Markets and Finance: Given the current economic situation, how soon and how quickly you think central banks, particularly the Fed and the ECB, should cut rates? What potential impact could this have on the global economy?

Steve Brice: From our perspective, the Fed is likely to start cutting only in June. I know there's been a lot of speculation in the markets, which has obviously been pushed back a little bit now. But people were anticipating a March rate cut, our sense is that will come out only in June.

The economy today still looks relatively robust, so from the Fed’s perspective, they say yes, inflation is coming down, but we've got this Middle East tensions and potential for inflation shock coming from there. They really want to avoid what happened in the 1970s when they got inflation virtually under control, and then we had a second surge. So as long as growth is strong, I think it makes it easier for them to stay on hold.

But as the economy weakens through the year, and we expect that say second half to be weaker than the first half, then a forward-looking Fed with higher real interest rates because inflation has come down means they have tight monetary policy settings, So they'll probably say, okay, we can take some insurance cuts to start with, starting in June.

From the Europe perspective, they’re probably a little bit further out. They have a harder conversation because growth is weaker, but inflation is already higher. And historically, the ECB has influenced by the old Bundesbank from Germany has generally been a bit more hawkish than the Fed. So from our perspective, they're probably only likely to start cutting rates in the second half of the year, despite that economic weakness that we're seeing.

The Outcome of U.S. Election May Influence Market Sectors Differently

SFC Markets and Finance: Besides the Fed and other central banks’ moves, what other key factors will impact the performance of the equity markets this year?

Steve Brice: I guess everybody's focused on the political environment in the States. we're heading into elections. So I think that's going to be a major conversation, whether it has a big impact on markets. Often these things don't have a long-lasting impact, to be honest. I remember when Trump was elected the first time around, Everybody was like that's going to be the worst thing for the stock market.

And I think the stock market went down for about two or three hours, and then went on a massive bull run. So we shouldn't overplay these things. But I think it will lead to some significant volatility as people tried to figure out how the election turns out and what that means for policy. 

I think the second point is what does that mean for fiscal policy. We've seen stimulus being implemented by Biden last year, I think that both presidents are likely to pursue further policy easing, if Biden was to get a second term or Trump was to get a second term, the nature of that will be very different. So one would be more on the spending side, one would be more on the tax side. But again, that can lead to different sectors being seen as beneficiaries of different policies. So again, maybe at the aggregate level, not a huge impact, but could have an impact at the company level.

Barbell Approach Could be a Good Investment Strategy

SFC Markets and Finance: How do you explain the current correlation between stocks and bonds? In this environment, what investment advice do you have for stocks and bonds?

Steve Brice: The way that we look at this is in periods of high inflation, typically when inflation is above 3% in the U.S., you on average have a positive bond equity correlation. So if bonds are doing well, equities are doing well, and vice versa. 2022 was the epitome of how painful that can be for investors, when bond yields in face of an inflation shock went through the roof and stock markets went through the floor. That's clearly a challenging environment.

The way we've been looking at it this year is saying, well, we still think we're going to get the positive equity-bond correlation, at least in the beginning of the year, because inflation is still relatively elevated. But this time, it could be a tailwind. So the theme for our investment 2024 Outlook is ‘Sailing with the Wind’, because we see inflation coming down, we see interest rates coming down ultimately. And therefore, we see both bonds and equities, at least starting the year on a positive note.

Now bonds obviously have sold off a little bit. But we were increasing our allocation to high quality bonds at the moment, we've already done that again this year. So we're not too concerned about this 60/40 equity bond portfolio that a lot of people are writing off. I think there's two things there. One is it could do quite well in the short term, that's been the experience we've seen so far this year.

But secondly, of course you should diversify into other asset classes, whether that be gold, you should have a cash allocation on the sidelines as well, and then looking at alternative investments were available to sort of hedge inflation risk or other volatility that bond equities may struggle to hedge against it. The real risk is stagflation. So be diversified across as many asset classes as you can and to try to smoothen out the investment ride from a return perspective.

SFC Markets and Finance: With what you just said,What’s your view on the performance of global stock market this year? Are equity valuations becoming more attractive this year?

Steve Brice: If you're looking at global equities, the obvious place to start is the U.S. given the heavy weight in the global indices. So, we expect the U.S. to start on a strong note. And indeed, we've seen that. We are a little bit cautious, extrapolating that strong performance through the whole year at this point. The reason is because we believe there is still a risk of a recession.

I mentioned the indicators earlier. We have 14 indicators that we look at that sort of highlight whether there's a heightened risk of recession or not. And a 10 of those 14 are still saying there's a heightened risk of recession. We have a 30% probability of a recession in the U.S. this year. And we think that probability is more tilted towards the second half of the year.

So the way we're positioned, we're overweight the U.S. equities, and we're overweight global equities. But we have trim back that overweight because we think valuations are getting a bit expensive. From our perspective, I think we have a situation in the market where we have strong foreign markets that are expensive, and we have weak performing markets that are very cheap. And it's just trying to balance the allocations that we have to those, but we are overweight U.S. equities at this point.

SFC Markets and Finance: Which sectors would you say are better positioned in the current economic backdrop? Any advice or strategy for investors? 

Steve Brice: From our perspective, I think from an equity market perspective, the sector point, we have a barbell approach. So because we're expecting interest rates to come down, and growth to come down, we're sort of saying, okay, which are the areas that are more beneficial from lower growth, or at least more resilient to slower growth, and which are going to benefit from lower interest rates as well. 

So clearly, on the more pro risk side, technology and communication services are two sectors we like, they are both more resilient to growth slowing and also benefit from lower interest rates. On the other side, much more defensive, we have an overweight to healthcare as well, they generally have much more stable earnings through the economic cycle. They don't get much benefit from lower interest rates, but if we did get an environment where growth was slow significantly, and inflation was to be elevated, then healthcare would probably be a good hedge to your portfolio.

Significant growth opportunities Asian Equity Market

SFC Markets and Finance: Do you think investors can look outside the U.S., for instance, consider Asian equity exposure? Why or why not? 

Steve Brice: We would always suggest that people are diversified across different asset classes, different regions, different risk type of assets as well. So, in bonds, we're overweight investment grade bonds at the moment, but we still have an allocation to high yield bonds. Because nobody knows for sure what's going to happen. As far as Asia ex-Japan equities is concerned, we have around 11% allocation in our growth portfolio to Asia ex-Japan equities. We have that as a neutral allocation to us. So, it's not a preference.

But we have significant growth opportunities in these markets. Whether you're looking at India, is a very positive growth story and a structural one. ASEAN as well. And China, let's not forget that if we're saying the U.S. was resilient at 2.5% growth last year, China is still outpacing what we see globally. So very strong growth driver from that perspective. We have some markets that are very expensive. India is very expensive. It's almost pricing that strong growth story. And then the other extreme, we've got Chinese equities which are still pretty cheap. So from our perspective, that 10% plus allocation to Asia ex-Japan in the current environment balances out all of these positives and negatives for the region.

SFC Markets and Finance: Can you further elaborate on the outlook of China's stock market this year?

Steve Brice: From our perspective, we have a neutral allocation to Chinese equities, which in a growth portfolio is around 3%~4% allocation. So it's a decent size allocation. Just to put that in context, Japan, which we have an overweight allocation is also a 4% allocation. So it gives you a sense of the positioning. Obviously, valuations are very cheap, that is a massive positive. They were cheap at the end of last year, they've cheapened this year. And from our perspective we're saying, sentiment is seeming so negative at the moment that it probably wouldn't take much for the market to do well.

So I think the overall story is yes, there's some challenges on the economic side as well, but given how oversold markets have been and how bearish sentiment is it, having an underweight allocation to Chinese equities is really dangerous because we know when Chinese equities rally, they can rally very, very quickly and very sizably. That's why we wouldn't have an underweight allocation despite the bearishness in the market.

I think one thing that we would love to see is inflation starting to turn around and moving higher. When you've got deflation, people will talk about that as a concern for the economy, for debt management, for corporate earnings’ growth. So if we were to see inflation bottomed out, and move sustainably higher towards, say, 2%, I think that would be a massive alleviation of a negative from a sentiment perspective. And that's something that could lead to a very strong market rally in China.

（市场有风险，投资需谨慎。本节目嘉宾意见仅代表本人观点。）

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记者：李依农 杨雨莱

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