Here are some of the biggest stories from last week:
Dig deeper into these stories in this week’s review.
China received some bad news at the start of the week, with new data showing a key measure of factory activity contracting for a fourth straight month in August. More specifically, the official manufacturing PMI declined to 49.1 last month from 49.4 in July. That means the reading has been below the crucial 50-mark separating growth from contraction for all but three months since April 2023. And while there was a slight uptick in the official non-manufacturing PMI for August, a private survey a few days later showed services activity expanded by less than expected during the month, due to increased competition and price cuts by companies aiming to preserve their market share.
The weak showing, combined with worse-than-expected GDP data earlier this year, has led several investment banks to slash their growth forecasts, with the vast majority of them now expecting China’s economy to expand by less than 5% this year. (For reference, the government has an official 2024 growth target of “around 5%”). The latest to cut its view is Bank of America, which said this week that it now expects the world’s second-biggest economy to expand by 4.8% this year, down from a previous forecast of 5%. Growth may slow further to 4.5% in the next two years, compared with an earlier estimate of 4.7%, the bank said.
Investment banks’ bearishness on the Chinese economy is increasingly being reflected in their recommendations for the country’s shares. Just last week, for example, JPMorgan dropped its buy recommendation for Chinese stocks due to increased uncertainty from the upcoming US elections, alongside slow economic growth and weak policy support. The move follows similar ones by former China bulls UBS Global Wealth Management and Nomura in the past few weeks.
Amid the country’s dimming prospects and the likelihood of better returns elsewhere, new emerging-market equity funds that exclude the world’s second-biggest economy are sprouting up like there’s no tomorrow. Case in point: as of the 4th of September, 19 emerging market ex-China equity funds have been launched this year – already matching the annual record set in 2023.
In contrast, India is red-hot among investors, who see huge potential in the country’s rapidly expanding, consumption-driven economy – forecast by the International Monetary Fund to grow by 7% in 2024. The excitement has sent India’s stocks 40% higher over the past year, but that’s also left them looking quite expensive. For example, the MSCI India’s forward P/E ratio is currently 24x – roughly 25% above its ten-year average. What’s more, the index’s valuation premium over its Asia Pacific counterpart is at a record high. Those concerns have pushed foreign institutional investors to pull money out of the Indian stock market, with more than $1 billion of net outflows in August, according to Bloomberg. That’s left year-to-date net inflows at around $2.6 billion – well below the $22 billion recorded last year.
As foreigners retreat, domestic investors are more than happy to fill the gap, with a growing number of young Indians increasingly opting to put their savings in stocks instead of more traditional stores of wealth, like gold or real estate. In fact, a net $70 billion of domestic retail money has flowed into Indian shares since 2022, according to Macquarie. But some commentators are growing concerned that this new generation of young Indian investors don’t fully understand the risks, given that they’ve never seen a market correction, and might be putting too much of their savings into stocks as a result.
A few years ago, near-zero interest rates led investors to pour cheap, borrowed money into riskier startups, inflating their valuations. However, as rates rose, venture capital funds struggled to raise new capital, leading to a sharp decline in startup valuations. That caused investors to focus primarily on AI-related companies, leaving many other startups stranded. Case in point: US startup failures jumped 58% in the first quarter from a year ago, as many companies ran out of cash raised during the tech boom of 2021-2022. Further exacerbating the issue was the collapse of Silicon Valley Bank, which had been a big provider of venture debt. Economists are now raising concerns that this trend could jeopardize millions of jobs in venture-backed companies and potentially affect the broader economy.
This week hasn’t been the best for energy investors, to say the least. The price of Brent crude, the international oil benchmark, fell 4.9% to $73.75 a barrel on Tuesday – its weakest level since December and the first time it has slipped below $75 since January. The US equivalent – WTI – slid by 4.4% to $70.35 before continuing to fall the next day, dipping below the $70 mark for the first time since late 2023.
The drops were driven by a deteriorating outlook for the oil market. Downbeat economic data from China and the US has stirred fears over demand in the world’s top two oil consumers. At the same time, a key Libyan official predicted this week a resolution to the crisis that has recently shut down around 60% of its 1.2 million barrels a day of oil. Compounding the supply worries, OPEC+, which has announced several production cuts and extensions to these curbs since 2022, had intended to bring some output back online starting in October. But after this week’s price rout, the cartel said that it’ll postpone its oil supply hike by two months.
General Disclaimer
This content is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell. Investments carry risks, including the potential loss of capital. Past performance is not indicative of future results. Before making investment decisions, consider your financial objectives or consult a qualified financial advisor.
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