India Outshines Hong Kong

Here are some of the biggest stories from last week:

• The Bank of Japan maintained its negative interest rates.
• US economic growth trounced forecasts last quarter.
• The European Central Bank held interest rates steady.
• India overtook Hong Kong as the world's fourth-biggest stock market.
• Chinese authorities are considering a package of measures to stabilize the country’s slumping stock market.
• US bitcoin ETFs pulled in $833 million in their first week of trading.

Dig deeper into these stories in this week’s review.

Macro

The Bank of Japan has long been clinging to its ultra-low interest rates, even when many of the world’s central banks were hiking borrowing costs. That’s because it’s trying to nudge consumer prices higher after battling with economy-crushing deflation for more than two decades. So it was perhaps not too surprising when the bank kept its rates at minus 0.1% on Tuesday – remaining the only major central bank to uphold negative interest rates. It also stuck to its yield curve control policy that keeps the upper limit for 10-year Japanese government bond yields at 1% as a reference.

The BoJ revised its forecast for core inflation, which excludes food prices, for the 2024 fiscal year, lowering it to 2.4% from the previous estimate of 2.8%. But that still leaves the pace of price gains above the central bank’s 2% target for some time, as has been the case since April 2022. That, combined with other major central banks signaling a change in their stances, left investors hoping that the BoJ would also alter its policy and offer some indication of when it’ll start lifting interest rates. But much to their disappointment, the central bank offered no such guidance. Economists see April as the most likely timing for the end of negative rates, allowing the BoJ to assess the results of annual pay negotiations considering that it sees higher pay as crucial for securing a positive cycle of rising prices and wages that feeds into economic growth.

Over in the US, growth in the world’s biggest economy blew past expectations in the fourth quarter, as lower inflation and a hot job market encouraged Americans to keep spending. GDP grew at a 3.3% annualized rate last quarter from the one before – a slowdown from the 4.9% pace recorded in the third quarter, sure, but trouncing forecasts of 2%. That was mainly driven by the economy’s biggest growth engine, consumer spending, which rose at a 2.8% rate. The figures are the latest evidence of the US economy’s remarkable resilience in the face of the Fed’s aggressive rate-hiking campaign: instead of plunging into recession last year, as many had warned, it expanded by 2.5% instead.

Across the pond, the European Central Bank kept its key interest rate on hold at a record high of 4% for a third straight meeting, in a move that was widely expected by economists. The bank stuck with its previous message that rate cuts may still be some way off, repeating its determination to hold borrowing costs at “sufficiently restrictive levels for as long as necessary”. But that warning seems to be falling on deaf ears, with traders still betting that the ECB is more likely than not to cut rates in April.

This coincides with economists revising down their projections for eurozone growth and inflation this year, prompted by discouraging data on industrial production, producer prices, business orders, and retail sales. However, with attacks on ships in the Red Sea disrupting supply chains and posing an upside risk to inflation, it’s also understandable why the ECB is cautious about loosening monetary policy too hastily.

Stocks

India's stock market capitalization just surpassed Hong Kong's for the first time, marking a big shift in the global financial landscape. As of Monday's close, the combined value of shares listed on Indian exchanges reached $4.33 trillion, versus $4.29 trillion for Hong Kong. That left India as the world's fourth-biggest equity market, and came on the back of a strong rally over the past year fueled by a rapidly expanding base of retail investors and robust corporate earnings. The nation's appeal has positioned it as a compelling alternative to China, drawing significant capital from global investors and companies, attracted by India's stable political environment and a consumption-driven economy that ranks among the fastest-growing of major nations.

India’s remarkable surge has coincided with a historic slump in Hong Kong and China, with the total market value of their stocks having tumbled by more than $6 trillion since their peaks in 2021 – roughly equivalent to the entire market capitalization of Japan. This decline is due to a multitude of challenges China has faced in recent years, including strict pandemic measures, regulatory actions targeting corporations, an ongoing debt crisis in the property sector, and escalating geopolitical tensions with the West. These factors have all combined to erode China’s appeal as the world’s growth engine, pushing investors to shun its stock market.

Then there's demographics. India surpassed China as the world’s most populous country last year, in a pivotal moment for the two neighbors and geopolitical rivals. And while China’s population is aging and shrinking, India’s is relatively young and growing, with half of the population under the age of 30. What’s more, over two-thirds of India’s population are of working age (between 15-64 years old), meaning the country can produce and consume more goods and services, drive more innovation, and so on. That’s why India is poised to become the world's fastest-growing major economy in the coming years, and is projected to surpass both Japan and Germany in size by 2027, securing its position as the third-biggest economy globally.

Making matters worse for China, pessimism toward the country has further deepened in the new year amid a lack of major economic stimulus announcements by the government. But it did emerge this week that authorities are considering a package of measures to help prop up the country’s slumping stock market. Policymakers are seeking to mobilize about 2 trillion yuan, mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link. They have also earmarked at least 300 billion yuan of local funds to invest in onshore shares.

This initiative follows recent efforts by authorities to bolster the country's faltering stock market, including limits on short-selling, cuts to trading fees, and purchases of bank shares by a government investment fund. But those measures have so far failed to halt China’s stock market slide, with the CSI 300 index down by 18% over the past year.

Crypto

It’s safe to say that US investors embraced the new spot bitcoin ETFs with open arms. The new funds, which include those from BlackRock, Franklin Templeton, and Fidelity Investments, saw net inflows of $833 million in their first week of trading, which spanned three days. BlackRock led the way with $498 million of inflows, followed by Fidelity with $422 million. That was offset by $579 million of outflows at Grayscale. That’s not entirely surprising considering that Grayscale’s ETF is the priciest on the market by a wide margin: it’s still charging a 1.5% fee, which is more than a percentage point higher than the new market entrants.

But in what will go down as a classic example of “buy the rumor, sell the news”, the price of bitcoin has now fallen by over 20% since the January 11 launch of the first ETFs investing directly in the cryptocurrency. The coin had surged by almost 160% last year, trouncing traditional assets such as stocks, amid speculation that the ETFs would catalyze wider bitcoin adoption by institutional and retail investors by allowing them to easily invest in the cryptocurrency without directly owning it in a digital wallet.

Next week

• Monday: Nothing major.
• Tuesday: Japan unemployment rate (December), eurozone GDP (Q4), eurozone economic sentiment (January), US consumer confidence (January). Earnings: Alphabet, Microsoft, General Motors, Pfizer, AMD, Starbucks, Mondelez.
• Wednesday: Japan industrial production and retail sales (December), Fed interest rate announcement, China PMIs (January). Earnings: Qualcomm, Boeing, Mastercard, Novo Nordisk, Thermo Fisher Scientific.
• Thursday: Eurozone inflation (January), eurozone unemployment rate (December), Bank of England interest rate announcement. Earnings: Amazon, Apple, Meta, Merck & Co.
• Friday: US labor market report (January). Earnings: Exxon Mobil, Chevron, AbbVie.