Daily Commentary

MarketMinder’s View: Some widely watched monthly economic indicators weakened in China last month. Retail sales slowed from July’s 3.7% y/y to August’s 3.4%, as did industrial production (5.7% y/y in July to August’s 5.2%)—and both fell short of expectations. This recap includes a spate of other datasets, including real estate investment, fixed asset investment and urban unemployment, but the broad takeaway: Domestic demand is flagging. We agree Chinese economic growth is slowing—and some areas may slow further still. As one economist pointed out here, “The slowdown in retail sales growth was mainly due to weaker demand for home appliances and electronics, as the boost from Beijing’s consumer goods trade-in subsidies started to fade, Lisheng Wang, China economist at Goldman Sachs, said in a note Monday. Wang expected consumption growth to slow ‘more meaningfully’ from September due to the ‘unfavourable base effects,’ stressing that ‘incremental and targeted easing’ is necessary in the coming quarters.” We disagree with that last point—targeted stimulus may boost growth to a small degree, but it doesn’t appear “necessary” for China’s expansion to continue. Interestingly, another economist posited that August’s slowdown isn’t a surprise, as “investors had already expected growth to weaken in the third quarter.” While doubters remain, it seems like more observers are noticing the long-feared “hard landing” may not be coming to pass any time soon—reality hasn’t been as dire as many thought. For more, see last month’s commentary, “Global Economic Roundup.”

MarketMinder’s View: Please note, this piece mentions several publicly traded firms, and MarketMinder doesn’t make individual security recommendations—they are coincident to the titular theme we wish to address. According to this article, the coolest Wall Street trade today is known as “run it hot,” i.e., now is the time to buy because “Tax cuts and falling interest rates will heat up the economy, fueling a new burst of growth.” It is a variation of the “Don’t fight the Fed” investing adage, which argues rate cuts will buoy the economy, sending stocks higher. But we see a couple issues with this thesis. One, rate cuts (or hikes for that matter) don’t have predetermined market effects. Two, while the consensus presumes the Fed will lower rates this week, that doesn’t mean a rate-cut cycle is underway—central bankers’ actions aren’t predictable, so don’t overstate what a single monetary move will mean for stocks or the economy at large. Another interesting note: Despite the seeming ebullience in the article’s first half, skeptics voice concerns in the back half. One market strategist thinks the “stock market is just misinterpreting the state of affairs” since the Fed purportedly cuts when it is worried about a recession, while another expert worries what a weaker labor market means for the economy. This mixture of optimism about an overrated market driver (rate cuts) and concern of a false fear (the labor market is a late-lagging indicator) provides a snapshot of sentiment today—worth monitoring as investors weigh how expectations align with market fundamentals (e.g., how the global economic backdrop and political activity affect the outlook for corporate earnings over the next 3 – 30 months).

MarketMinder’s View: Here is an interesting development in the world of equity market indexes: “Vietnam targets to meet MSCI’s emerging market upgrade criteria by 2030 as it pushes forward with efforts to appeal to more foreign investors, according to a statement on the government website. Under a newly approved plan, the Southeast Asian country seeks to simplify procedures for foreign investors, including in terms of registration and account opening, and to streamline current processes to open indirect investment capital accounts.” Now, index reclassifications tend to follow rather than lead returns, so they aren’t a path to outperformance—the article points out markets have already digested the news to an extent, as Vietnam’s “… benchmark VN Index has outperformed Southeast Asian peers this year, rising by more than 31%, on optimism over economic growth and the potential upgrade of its market classification, which would potentially bring in foreign funds.” (Note that this isn’t even assured—going from a Frontier Market heavyweight to a much smaller Emerging Market weight could mean less or a similar amount of investor interest.) Two, Vietnam’s 2030 goal doesn’t mean it will happen—South Korea, for instance, has been pushing to earn MSCI’s developed market status for years, but reforms have been slow-moving. Still, Vietnam’s plans highlight its progression as a global economic player, a sign of markets’ dynamism.