Signal or Noise: This is the biggest event of the year for markets

Since the last episode of Signal or Noise was taped in early December, the narrative around the global economy has shifted dramatically. But nowhere has it shifted more than in the world's second largest economy.

While most major markets were in holiday mode, the Chinese government decided to reopen its economy and people to the rest of the world. The landmark move followed three years of intense lockdown restrictions. And much like the experience of other countries, consumers have a lot of pent-up savings - nearly ¥6 trillion according to one estimate from Bank of America.

But a lot of questions remain:

• How quickly can Chinese factories return to full speed? 
• Will consumer confidence rebound - and will they spend as much as analysts are expecting?
• Will Chinese students return to our shores?
• What will iron ore demand look like in a post-COVID China?

These issues and many more are tackled in the first episode of the brand new series of Livewire's series for economics. 

I am delighted to be back in the host chair and am joined this episode by:

• Shane Oliver, Chief Economist and Head of Investment Strategy at AMP
• Garry Laurence, Founder and CIO of Profeta Investments
• Jonathan Wu, Chief Investment Specialist of Premium Asia Funds Management

Note: This episode was taped on Wednesday 8th February 2023. You can watch the show, listen to our brand new podcast, or read our summary below.

EDITED SUMMARY

Topic 1: Will China’s reopening save us from recession?

Shane: SIGNAL - Reopening will boost the Chinese economy after a depressing 2022, especially when the government is trying to target 6% growth. If this scenario is borne out, Australia could avoid or experience a very mild recession.

Garry: SIGNAL (with a lot of noise) - There is noise in the data coming out but if you take a more medium-term view, the economy will definitely accelerate this year.

Jonathan: SIGNAL - Jonathan believes the economy's recovery will be consumer-led. The "revenge spending" trend has hit the Chinese economy. Fiscal stimulus will likely depend on how long this revenge spending lasts.

Topic 2: Chinese equities enter technical bull market

Garry: SIGNAL - The market has got it right when it comes to valuations. There was a lot of Western outflow at the expense of Hong Kong-based equities when COVID-zero was the main policy. Now that has changed, the money is coming back in and the rally has been "fair". 

Jonathan: NOISE - As an active stock picker, Jonathan believes the rally we've seen is just a "reversion to mean". A lot of whether this rally is durable will likely come down to earnings and how Chinese corporates handle the post-lockdown world. The perfect example of this question is Chinese electric vehicle companies.

Shane: SIGNAL - While he believes Australian shares will outperform their global peers, a rally in Chinese equities could be good news for the ASX.

Deep Dive: Why it's worth digging into Chinese stocks rather than just buying ETFs

Our education segment for this episode focuses on the dichotomy between stocks and ETFs. Garry says he thinks it's worth turning to an active manager if you want exposure to that stock market rather than in ETFs. Jonathan agrees, arguing the market is much more inefficient in China than it is in Australia or the US. The primary reason for this is the presence of state-owned enterprises, which have not traditionally been run in a shareholder-centric model. While this has changed in the last ten years, it's still a big challenge for passive investors. 

Topic 3: A $140 Iron Ore Price?

Jonathan: NOISE - The psyche has changed for good among Chinese consumers and the need to buy property to get ahead. He believes analysts are being too positive around the de-regulation of the "Three-red line" which is a major factor in property prices.

Shane: NOISE - Shane admits he finds it very difficult to peg iron ore price forecasts, though he does think they will be higher for longer (which is good news for the Treasury).

Garry: NOISE - It's not just about the demand side, it's also about the supply side! And given the property data is still volatile month-to-month, companies playing in that space will be faced with more challenges to come. 

THE CHARTS TO WATCH

Shane: Chinese economic indicators

Garry: Chinese household income growth

Jonathan: Baidu immigration index

We hope you enjoyed the return of Signal or Noise. If you have questions you'd like us to pose to the panel for you or subjects you want to hear more debate about, get in touch via email: content@livewiremarkets.com.