Daily Commentary

MarketMinder’s View: We kind of hesitated to feature a deep dive on a single Chinese economic data point that won’t be out until Monday, but it is a good discussion, so here you go. Through October, China’s fixed asset investment is down year to date. Should that hold through November (out Monday) and December, it would mark the first annual decline in decades. While that sounds like a worrying sign for China’s economy, this piece does a good job showing a key point: To a large extent, the investment downturn seems deliberate. After China’s property bubble burst, developers had a glut of uncompleted apartments to work through. Meanwhile, spurred on (and subsidized) by local governments anxious to meet growth targets, factory capacity overshot as everyone cut prices to seize market share. National policymakers have long sought to curb this. So a lot of the investment decline looks to be about taming excess and fixing the side effects of prior policy pushes, both of which are about putting China’s economy on more stable footing long-term. The article goes on to speculate about what this means for headline growth, noting some odd discrepancies between China’s volatile investment and steady GDP growth around 5%. A fine enough observation, but no country’s data are perfect—seasonal adjustments and inflation adjustments always muddy the water a bit. Moreover, for all the emphasis on heavy industry here, most of China’s economy is now services. A more modern economy is more insulated from the issues discussed here. So even with this investment downturn, China can still contribute to global growth, which is what developed world stocks care about most.

MarketMinder’s View: We often note that high and rising uncertainty can discourage risk-taking, weighing on investment, as people enter wait-and-see mode. The UK’s monthly GDP report for October looks like a prime example. GDP fell -0.1% m/m, and the Budget’s pending unveiling looks like the key culprit. With the Budget due out on November 26, October was chock full of Treasury leaks and trial balloons about potential tax changes. The landscape was constantly in flux, with ideas on the table one day and in the bin the next. And it seems many sat on their hands as a result: “The ONS said businesses across all three main sectors of the economy – services, production and construction – reported that they, or their customers, were ‘waiting for the outcomes of the budget’. The biggest impact was felt by manufacturers, construction companies, wholesalers, computer programmers, real estate firms and employment agencies. [One analyst] said the chancellor’s budget had a ‘numbing effect’ on the economy. He said: ‘Budget speculation and uncertainty around potential tax changes dampened the mood among businesses and consumers, leading some to delay key decisions until the budget had been delivered.’” The other major contributor was the aftermath of a September cybersecurity incident at one major auto manufacturer, which idled production lines and whose effects lingered into October. All these just look to us like the normal short-term blips that quarterly readings tend to even out. At any rate, don’t be shocked if November also looks weak, given Budget uncertainty continued until that month’s end. But with the lay of the land now a known quantity, everyone can adapt and move on.

MarketMinder’s View: This isn’t a huge deal, but it should ease some uncertainty for some US businesses (which reminds us, MarketMinder doesn’t make individual security recommendations, and those mentioned here merely represent the broader theme). The One Big, Beautiful Bill Act (OBBBA) reinstated full up-front tax deduction for research and development (R&D) spending, which the Biden administration had allowed to sunset. Sweetening the deal, the OBBBA made the change retroactive, which sounds good, but some companies were hesitant to claim it because it risked shunting them into the corporate alternative minimum tax (AMT)—the blanket 15% rate on companies earning at least $1 billion annually, which was designed to curb avoidance. The OBBBA left the Treasury considerable latitude for how to implement the new laws, and guidance is reportedly forthcoming that should patch the AMT issue. “Corporations have also complained about the interaction between the R&D deduction and international tax rules from Trump’s first term that discourage companies from shifting profits to lower tax jurisdictions overseas. But it’s unclear whether the upcoming guidance would address that, or whether Treasury would have the statutory ability to do so.” Setting aside the politics here (we are always agnostic, preferring no party or politician and assessing developments for their potential economic and market implications only), the last two years have shown companies don’t need up-front deductions to continue investing. Corporate welfare isn’t powering growth. But having clarity is always helpful, and investors tend to welcome it. So whatever you think of this possible policy change, getting bright lines from the Treasury on it would be a plus.