CoreMacro

Chinese stock prices have significantly decoupled from the country’s business cycle, with the full impact of US tariffs yet to be realized. The valuation-driven equity gains without a cyclical economic recovery will be vulnerable to a reversal.

Special Report

Investors often ask us which industries the Chinese government is prioritizing for expansion. The assumption is that investing in sectors hand-picked authorities will produce solid investment returns. Yet, this assumption has not held over the past decade.

Beijing’s supply-side push faces steeper hurdles than in 2016. With limited demand support and tighter constraints on cutting capacity, today’s reforms are unlikely to pack the same punch.

This report analyzes China’s persistent deflation, which is rooted in supply-side forces. Consumption support will be slow and incremental, keeping deflationary pressures elevated for the next 6–12 months.

The London Sino-US trade talks offered hope of de-escalation, but Chinese equities remain under pressure from deflationary headwinds and lack a clear macro catalyst to trend higher.

Chinese tourism will continue growing, but investors should be mindful not to overpay for Chinese tourism stocks by extrapolating their past double-digit revenue growth into the future.

Special Report

The prevailing narrative around the world is that Chinese households are not spending enough and that China has overly relied on exports for economic growth. Some parts of this conjecture are incorrect. The primary economic imbalance in China is neither inadequate consumption nor outsized exports. The main economic excess is overinvestment.

Despite marginal de-escalation in tariffs between the US and China, a sustainable trade agreement remains elusive. In the meantime, economic damage continues to mount, and Chinese equities have yet to fully price in the tariff-induced growth deterioration.

While the United States and China may aim for full decoupling, all they can afford now is some form of trade skirmishes. Increasing economic pressure will eventually force both Washington and Beijing to pursue more proactive negotiations. Until then, internal economic and financial strains are likely necessary to break the stalemate and resume dialogue between the two nations.

Special Report

This week, we look at the sustainability of the HKD peg as the next whale to move markets, given what is happening to tariffs. After careful analysis, our bias is that it is here to stay. With the DXY dipping below 100, we are likely to see a rebound, which is actually bad news for the Hong Kong region of China, since it will tighten financial conditions. We have no new short-term trades, but if the peg broke, you want to be short HKD/JPY.