Old Mutual Investment Group

Macro Perspectives 33 | Analysing the tentative emergence of rate cuts

August 16, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspectives 33 | Analysing the tentative emergence of rate cuts
Show Notes Transcript Chapter Markers

Peter Brooke shares his latest macro perspectives, this week analysing the rationale for recent rate cuts in China and the investment opportunities that this environment is creating.

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Peter Brooke  00:00

Good day, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 33 of 2022, and I want to talk about rate cuts. Yes, you heard that right: rate cuts. 


This week we've had our first rate cut. Well, outside of the crazy policy from the Turkish Central Bank. It was the Bank of China, which cut rates, albeit by only 10 basis points to 2.75%. This is good news as it signals the first major economy to start loosening policy. Now, they're not doing this because things are going well. I read a great article in the FT talking about a 50% decline in secondhand prices of luxury watches. And this is because the owners are forced to liquidate their collections to raise cash for their struggling businesses. But bad news always leads to good news. And right now, the Chinese economy is in a world of pain. 


Much of this is due to very deliberate public policy choices, with a crackdown on property being the main catalyst. Remember, houses are for living in, not for speculation. The result of this policy is that new starts of houses in China are 45% down year on year, and it's a complete bloodbath for property developers. However, regulators are now stepping in to try and bandage the wounded and bury the dead. So, at the fringes, China is going from bad to better rate cuts and some policy support. At the same time as they're trying to wean the economy off leverage, they are still pursuing their China 2025 policy. There's ongoing investment and subsidization in new economy winners like electric vehicles and battery manufacturers, and high tech manufacturing, including chips. 


The result of this is that the China's A-Share market is looking quite interesting, and we have made some small additions to our holdings there. Medium term, the big catalyst for further improvement is a reduction in China's zero-Covid policy. Cutting interest rates doesn't help if people can't go outside to spend. A good example of a beneficiary of this would be the Thai stock market, where we've been doing some work where the Chinese tourists coming back would have a huge impact, as with the benefit to our own economy in South Africa, through increased resource utilisation. 


In summary, we're seeing some glimmers of light amidst the Chinese gloom, but one needs to be selective on investing where policy is supportive. And that's definitely true as Xi Jinping, and the Chinese Communist Party head into the 20th Party Congress in Q4. You don't want to be going in the opposite direction to where the politicians are heading at the moment. I hope you enjoyed this perspective. Until next week.

The rate cut in China – good news that signals that a major economy starting to loosen policy
The negative impact of public policy choices in China, with the crackdown on property as the main catalyst
The results of loosening policy
Summary – glimmers of light amidst the Chinese gloom