It’s Not Just China’s Economy Reopening
Contrary to any suggestion from China’s latest GDP data that pent-up consumer demand is being unleashed in the country, we don’t expect a broad-based transfer of savings into consumer goods and services. One aspect of this case, as we set out in February ,is that China’s “excess savings appear to be a structural change in the preference of certain financial assets”, rather than a temporary home for unspent wages. In our view, this structural change reflects a lack of confidence in the property market and increased regulatory scrutiny on wealth-management products, encouraging wealth to be kept in bank deposits.
But now, as financial conditions ease against a backdrop of a modest rebound in overall consumption as mobility returns and a lack of income-generating alternatives, there is a powerful justification for retail inflows back into onshore equities. Evidence that this is transpiring can be found in the doubling of new margin account openings in March compared with January and February (Figure 1). Over the same period, margin trading balances have meaningfully picked up as a percentage of A-share free float. While early, it suggests retail investors are returning to the market.
Clear beneficiaries of this shift are select local brokerage stocks, where a pick-up in retail order flow is yet to be reflected in consensus expectations. We expect there to be several other areas of the market where China’s reopening should deliver upside to consensus earnings over the remainder of the year; we believe identifying them will require focusing on idiosyncratic earnings drivers where changes in fundamentals are not reflected in share prices. The tailwind from increased retail investor participation in A-shares is likely to exacerbate the valuation multiple expansion which usually accompanies earnings upgrades.
Figure 1. Monthly New Margin Account Openings in China
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Source: Bloomberg; as of 31 March 2023.
The Additional Threat to the Banking Sector
It’s been more than a month since the collapse of Silicon Valley Bank (‘SVB’) and we’re still feeling the effects of it in the real economy.
For the past two weeks, we have spoken about how the commercial real estate (‘CRE’) sector could be the next domino to fall as the banking crisis comes off a boil. This week, we turn our attention to how the shift into money market funds further threatens the stability of the banking sector.
Money market funds are vehicles that invest predominantly in ‘safe’ assets such as short-term government debt. As returns offered by these funds have soared, so has demand: bank deposits have fallen and cash has flowed into money market funds instead; they have drawn in more than $340 billion since the beginning of March, the highest since April 2020 (Figure 2).
Figure 2. Assets in Money Market Funds Have Soared
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Source: Bloomberg; as of 12 April 2023.
The reason money market funds can offer better returns (than say banks) is because these funds are heavy users of a Federal Reserve (‘Fed’) facility that offers a high interest rate to park cash there overnight. Money parked at the Fed is not given out as loans. In fact, it typically ends up outside the banking system altogether.
And herein lies the ‘real’ economy issue: as depositors park their money into money market funds rather than banks, this puts a strain on lenders (especially the smaller ones), resulting in them being disincentivised from giving out loans.
With contribution from: Andrew Swan (Man GLG, Portfolio Manager) and Ed Hoyle (Man AHL, Head of Total-Return Strategies)
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