Esperio: China’s Growth Helped Western Indexes Rebound

The reopening of the Chinese economy and solid Chinese data has given hope to the investment community for global recovery. At the same time, the UK and most EU countries continue to struggle, and concerns arise over US subsidies potentially encouraging businesses to abandon Europe.

March has come with renewed hopes for that part of the investment community which is still holding on to some bits of optimism. These hopes are kept alive by strong Chinese data which diluted stormy weather concerns after major central banks stuck to their aggressive monetary stance for longer than expected and the Western corporates are subjected to the so-called “earnings recession”.

The activity in China’s manufacturing segment has prompted higher chances for global recovery, as the highly anticipated update of the Purchasing Managers’ Index (PMI) climbed to 52.6. That represents a favourable change from the previous month’s indication of 50.1, as a result of 50.0 corresponds to the watershed between nominal growth or decline for the economy. The PMI surprisingly showed the best expansion pace in more than a decade, just before the end of the winter season.

China is still the most important target market for European exports, and so the news clearly contributed to a rebound in stocks. Another survey showed that new home prices in 100 Chinese cities interrupted a seven-month negative trend. The level of real estate prices was steady in February compared to January as the governmental measures in the market finally bore some fruit. The property sector has been suffering because of developers’ debt troubles over the past couple of years. The corona restrictions also made the situation even worse. Now 26 cities reported higher house prices, vs 12 cities a month ago.

The British factories’ activity contracted in January, though at its slowest pace since mid-summer 2022, while 60% of manufacturers expect the gross production numbers to rise during the year. House prices in the U.K. dropped the most since 2012 with the number of mortgage approvals declining. The lender Nationwide said on Wednesday that this is the first annual decrease of the property market on the British Isles since June 2020. The Bank of England gave an even more negative picture showing the lowest number of approved mortgages since 2009.

Similar trends are observed on the continent in most EU countries, so the bets on the Chinese-fuelled recovery is one of the few that can actually work. The housing market, as well as the broader consumer demand, would struggle to recover soon against a still prominent risk of deepening the cost crisis. America can hardly serve as a reliable pillar for Europe, not only because its own economy has yet to obtain a firm plant on the ground, but also due to Joe Biden’s administration’s Inflation Reduction Act, which serves to promote climate-friendly technologies with benefits mostly for U.S.-rooted businesses.

According to a survey by the German Chamber of Commerce and Industry, among 2,400 companies from all economic segments, one in ten German enterprises is considering a possibility to relocate its production to the U.S. or other countries. About 23% of car manufacturing industry representatives are thinking about relocation, as the American electric vehicle tax credits would apply to chains with final assembly and key inputs made in the U.S. Some EU leaders expressed their concern that the U.S. requirements of localisation with $369 billion of subsidies would encourage businesses to abandon Europe.

Alex Boltyan, senior analyst of Esperio company

Esperio analyst note that this may create additional pressure on EU manufacturers and EU budgets. The reopening of the Chinese economy, at least for a little while, is boosting stock indexes on both sides of the pond, getting away from the negative sentiment that pushed the S&P 500 broad market index below the 4,000 psychological threshold. Nevertheless, persisting psychological and inflationary pressure on real business may lead to a collapse in asset prices at any moment.

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