Where's the Chinese fiscal stimulus?

The likelihood of a Fed rate rise stands at 28%, but the movement seen in a raft of strength against the US dollar in trading today appears to indicate that markets think rates will be left on hold.

Chinese fiscal stimulus
Source: Bloomberg

The Aussie dollar spiked up to $0.7136 in trading today, its highest level since 1 September, only to decline in later trade.

This is a clear display of how a raft of currencies are expected to trade in the event of the Fed leaving rates unchanged. The AUD, JPY, EUR, among a raft of others, are likely to see a short-term strengthening rally against the USD, but this is likely to dissipate as their longer-term trend in the second half of the year is further weakness against the USD. Thus any strengthening bounce after the Fed meeting could be a good entry point to sell those currencies.

Chinese data out over the weekend provided a familiar view of its divergent two-speed economy, as consumption continues to do well while industrial production and investment slow. Retail sales growth came in above consensus expectations at 10.8%, while industrial output and fixed asset investment (FAI) both undershot at 6.1% and 10.9%, respectively.

It is thought that factory shutdowns surrounding the World Athletics Championship and WWII commemoration may have affected output somewhat. Nonetheless, the data is still pretty disappointing considering there have been frequent statements by the government, plus expectations in the market that investment would start to pick up in the second half of the year.

Infrastructure spending in FAI did grow 19.9% year-on-year in August compared to 16.4% in July, which is a bright spot. Although real estate investment declined 1.2%, showing that for FAI to hold up going forward, infrastructure spending is going to need to pick up the slack from the still-oversupplied property market.
 

Chinese fiscal stimulus

The weekend data appears to have spurred speculation that fiscal stimulus measures need to pick up in the second half of the year. One of the most notable features of the slowdown in China’s economy this year has been the failure of fiscal spending to pick up. In years previous, a frequent ebb and flow to the Chinese economy usually plays out.

The Chinese New Year holiday upsets all the Q1 data and everything looks very dire, this usually continues into Q2 when prophecies about China’s coming collapse usually reach their high point for the year, and then we see a big bout of fiscal stimulus in Q3 and Q4 to make sure the year’s GDP growth comes in on target.

This year the fiscal stimulus and investment has been slow to pick up in Q3. There are a few reasons why this may be the case. The biggest is that the Chinese housing market has well and truly peaked and a lot of supply overhang continues in tier 2 and tier 3 cities, which is crimping debt-laden property companies’ desire to invest in new projects. Another factor is that entrusted loans and wealth management products (WMPs) have largely been removed as a major financing channel for developers. Plus local governments have been restricted from issued bonds through local government financing vehicles (LGFVs).

The high-yield LGFV bonds are being moved onto the government balance sheet through the issuance of longer-term provincial bonds. Regional authorities had sold RMB 1.4 trillion of these bonds as of the end of July. And Minister for Finance, Lou Jiwei, recently raised this quota to RMB 3.2 trillion, which is a huge amount of new supply for the Chinese bond market to try to digest.

It is thought the state banks are being forced to buy this debt at much higher prices than the risks inherent in them. This is essentially a haircut on provincial debt that the state banks are being forced to take, despite not being the original holders of the LGFV debt. While this is beneficial for the finances of the Chinese provinces, it is clearly impacting the ability of the state banks to provide credit to productive parts of the economy.

Given this state of affairs, it is uncertain how much stimulus may be forthcoming. This may in part explain why the Shanghai composite opened up 0.6% - buoyed by stimulus speculation - only to begin to plummet 3.5% in later trading.
 

The ASX

The ASX spiked over 5120 three times in trading today only to drop back down to trading around the 5070-5090 range each time. The index saw a muted if solid performance across the board as the uncertainty around the Fed meeting hung in the air. The healthcare and utilities sectors saw the strongest gains, rising 0.86% and 0.66%, respectively. But the big drops seen in stock prices over the past month continues to fuel plenty of speculative buyout plays.

The big news on the ASX today was the unsolicited buyout offer of Cardno (CDD), the infrastructure and environmental services company, by Crescent Capital. The offer is $3.15 a share, a 26% premium to CDD’s Friday closing price, where Crescent plans to buy one share for every two held by other shareholders. It seems to be quite a speculative bid for the company considering the stock was trading at $3.50 in mid-June; it’s uncertain whether the offer will be enough to entice a sufficient number of shareholders. The massive drop in the stock’s price in Q4 2014 seems to have put it on the private equity radar as a buyout potential. Nonetheless, the stock has rallied 15.6%, more than half the premium offered, which seems to be indicating that investors are taking the buyout offer quite seriously.

Stockland Group (SGP) are rumoured to be mulling the $1.1 billion spinoff of their retirement arm. After reporting the highest funds from operations (FFO) growth of any A-REIT in FY15 at 13%, the property trust is looking to take advantage and sell off some assets while prices are high. SGP has guided FFO growth for FY16 at 8.5-10.0%, putting it at the top of the REIT sector again if it manages to achieve this. Clearly, if the trust was looking to spinoff some of its assets now is a good time, global market volatility aside.

Reports that Sydney and Melbourne auction clearances over the weekend were at some of the lowest levels this year, indicating that the housing market may be seeing a top. This is obviously a risk for the whole A-REITs sector. Investors do not seem wildly excited by the prospects of the deal, with the stock declining 1.3%.

James Hardie (JHX), one of the darlings of the off-shore earnings play, hosted the first day of its US investor tour. Management was keen to emphasise that primary demand growth (PDG) was expected to come in below the 8% achieved in FY15. The decline is largely attributed to management’s focus on improving manufacturing performance, but attention will return to growing PDG now that this has been achieved.

Forecasts for solid US housing growth are likely to boost company revenues from its core fibre cement market as it continues its attempt to take market share from wood siding producer LP Smartside. The stock seems to be supportive of management’s plans as it rose 2.2%.

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Denne informasjonen er utarbeidet av IG, forretningsnavnet til IG Markets Limited. I tillegg til disclaimeren nedenfor, inneholder ikke denne siden oversikt over kurser, eller tilbud om, eller oppfordring til, en transaksjon i noe finansielt instrument. IG påtar seg intet ansvar for handlinger basert på disse kommentarene og for eventuelle konsekvenser som et resultat av dette. Ingen garanti gis for nøyaktigheten eller fullstendigheten av denne informasjonen. Personer som handler ut i fra denne informasjonen gjør det på egen risiko. Forskning gitt her tar ikke hensyn til spesifikke investeringsmål, finansiell situasjon og behov som angår den enkelte person som mottar dette. Det er ikke utarbeidet i samsvar med lovens krav for å fremme uavhengighet av investeringsanalyse og som sådan er ansett av å være markedsføringskommunikasjon. Selv om vi ikke er hindret i å handle i forkant av våre anbefalinger, ønsker vi ikke å dra nytte av dem før de blir levert til våre kunder.