2023 October, Market Outlook - Navigating China's Property Challenges, US Consumer Trends, and Asia's Resilient Growth Prospects
After a month since China relaxed its housing restrictions, overall home sales continued to be weak as consumer confidence has yet to be restored meaningfully. We believe that homebuyers in China will remain hesitant until the industry can contain the liquidity issues faced by property developers. This is a challenging issue to tackle as continued low sales will further worsen the developer’s cashflow position, which in turn will affect consumer confidence. The administration will likely arrest this situation by issuing liquidity for developers to complete their projects. Through government actions, we believe that they can bring the housing situation under control. Aside from the ongoing geopolitical tension between China and the US, we see the property crisis as the last hurdle for an overall recovery, given the broader improving economic data and earnings resilience from the leading firms that we cover. We are also encouraged by the Chinese government's continuous support for the economy through increased spending, hence a bigger budget deficit and more domestic investments. We are beginning to see early signs of the Chinese economy stabilizing.
In early September, Huawei surprised the world by launching their Mate 60 Pro smartphone which carried a 7nm processor. Previously, the speculated limit for the Mate 60’s mass production using China’s existing technology was at 14nm. It is a clear win that China has produced this breakthrough internally despite continued semiconductor sanctions from the US. However, it remains to be seen whether China can mass produce such chips across multiple applications and further develop smaller nodes without access to cutting-edge machines. With the current geopolitical landscape, we maintain our view that the US-China rivalry will continue and possibly intensify over the long term.
Retail sales in the US surprised in September, growing 3.7% yoy. This came at the cost of lower consumer savings, dropping to levels not seen since before the global financial crisis. We attribute the sudden economic pick-up to be due to pent-up demand over the summer holidays. Thus, we think that the current consumption growth is unsustainable over the long term. We have also been monitoring the employment situation in the US, where we observe weakening employment in higher value-added industries such as finance, professional services, and information technology. Therefore, we are wary of the short-term recovery in economic data. Our base case remains that the fundamental prospects remain brighter within Asia. While developed countries undergo a period of slowing growth, we believe that the effects are non-systemic and will not have a detrimental effect on the rest of the world.
