WeeklyWatch – How China’s zero-COVID policy affects worldwide markets

06 December 2022

Stock Take

The COVID impact in China

A lot of us will have gathered with friends to watch the World Cup over the weekend, but it was a very different state of affairs in China last week, with their zero-COVID policy keeping a large portion of the population in a state of lockdown.

The continuation of the policy led to widespread protests resulting in the lifting of some restrictions. In some regions, these included the option to self-isolate at home rather than in quarantine facilities. Another example is the elimination of the requirement for a negative PCR test to visit outdoor public spaces or use public transport in Shanghai.

Due to China’s wider economic relevance, in particular its connection to global supply chains, these lockdowns have had a negative impact on the Asian giant’s equity markets over the past year – and a subsequent negative impact on worldwide markets.

Senior Emerging Markets Economist at Schroders, David Rees, anticipates that Chinese economic growth will accelerate in the coming year, with GDP growth rising from 3% in 2022 to 5% in 2023. He says:

“Infrastructure spending has been buoyant in 2022 and should underpin growth for a while longer as policy remains supportive.

“Meanwhile, housing indicators may have started to find a floor and could stage some recovery in 2023 from a very low base. And the service sector would clearly benefit from any loosening of COVID restrictions that may emerge during the course of the year. This would help to unleash the cyclical recovery that leading indicators have been suggesting for a while will get underway in earnest as we head into 2023.”

This new sense of optimism around the markets in China saw the Shanghai Composite increase by 1.8% last week.

Slowing interest rate rises in the US

In news beyond China and the World Cup, inflation and interest rates continued to rule the day.

Following remarks from Federal Reserve Chairman Jerome Powell, who suggested that the Central Bank could start slowing the pace of interest rate hikes this month, equity markets in the US continued to rise last week. Powell said that policymakers are mindful of overtightening, which may put the Bank in a position where it had to start lowering rates if the economy were to significantly deteriorate.

But be wary not to get too excited by these comments, warns Mark Dowding, Chief Investment Officer at BlueBay. He notes:

“Over the past couple of months, market participants have been seemingly determined to look for a more dovish Fed and this has led to a material easing in financial conditions. Yet a more sober assessment of Powell will reflect that the Fed Chair continues to expect a higher peak in rates than was the case at the time of the September Federal Open Market Committee (FOMC) meeting.

“The Fed has also consistently pushed back on the narrative that a period of monetary tightening would quickly be followed by a reversal into rate cuts. Consequently, it is possible that the rally in rates could have legs, but only if data in the next couple of weeks is very compliant.”

He continued that the US labour market and inflation data will be especially important ahead of the FOMC meeting in the middle of December.

Rising house prices in the UK

As we turn our attention to Europe, the MSCI ex UK index increased by 0.5%, partly thanks to CPI inflation data that slackened for the first time in nearly 18 months.

There is some anxiety around the UK over house prices following the release of November’s 1.4% month-over-month decline in home prices reported by Nationwide. This came after the Office for Budget Responsibility predicted that home values might drop by almost 10% over the next two years. Though it is important to keep in mind that these drops occur from a high point following two years of strong growth. According to Nationwide, property prices rose 26.5% between June 2020 and August 2022.

Although difficult times are ahead, a manager at TwentyFour Asset Management, Shilpa Pathak, has said that she does not anticipate a repeat of the housing crash of 2007. Greater regulation will lead to stricter lending standards than before, such as affordability rules that should result in lower default rates compared to the 2008 financial crash. She added:

“There is no doubt that borrowers today are coming under pressure and that’s going to continue for some time. Interest rates have gone up and are expected to rise further, so it is inevitable that there will be an increase in mortgage arrears. But the Bank of England is already commenting that inflation will ease next year and that interest rates may not need to rise as far as the market is predicting.”

Wealth Check

Gifts that keep on giving

There are many special things to celebrate over the festive period. After all, Christmas is the season for giving. But this year, many of us are beginning to understand that we need to be a little more prudent with our money.

In fact, giving our children or grandchildren money this year may be one of the most useful and appreciated gifts we can give them. Giving money or other assets is a gift that keeps on giving, whether it means a summer holiday with the family or supporting the financial well-being of a cherished grandchild.

Planning around Inheritance Tax (IHT)

There are a variety of tax-efficient options to give money or assets to your loved ones, all of which could result in considerable tax savings for you.

Giving money as a present this year may be a welcome ‘helping hand’ for the people you care about while also benefitting your legacy planning. As part of your planning around Inheritance Tax (IHT) mitigation, you can give away one large gift of up to £3,000 annually, as well as many smaller ones worth up to £250 each. Almost all gifts are exempt from IHT if you survive for seven years after giving. And you can also carry over your £3,000 tax-free gift allowance for another year if you didn’t use it the previous year.

Do keep in mind that for IHT purposes, you’ll need to keep records of the amounts and dates of any gifts you make.

Setting up a pension

Realistically, a child’s pension won’t trump the hottest toy of the year if you’re eight years old and it’s Christmas morning. And even when your grandchildren land their first job, contributing to a pension will likely be the last thing on their minds.

Opening a child’s pension account on their behalf is a kind, farsighted gift that can help them develop healthy saving habits at a young age and give them a real head start.

And in the years ahead, the advantages of creating a child’s pension are anticipated to increase even more.

Anyone can make contributions to a child’s pension, but only a parent or legal guardian can open one. Setting one up is simple, but you should always talk to your family about your plans and seek out our advice to ensure you’re claiming the right tax relief.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“For bitcoin proponents, the seeming stabilisation signals a breather on the way to new heights. More likely, however, it is an artificially induced last gasp before the road to irrelevance.”

– European Central Bank Director General Ulrich Bindseil and Adviser Jurgen Schaaf express strong opinions about the future of cryptocurrency in a blog post titled ‘Bitcoin’s last stand’.

TwentyFour, BlueBay and Schroders are fund managers for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies.

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Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

SJP approved 06/12/2022.