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Client Update - 14th April 2023

Inflation was front and central once more in market reporting this week, with US inflation falling slightly more than expected. Wednesday data showed headline annual inflation slowing from 6% in February to 5% in March, just below the expected reading of 5.1%. Core inflation, which is preferred by the US Federal Reserve (Fed) as it removes the more volatile food and energy price inflation, rose as expected from 5.5% to 5.6%. This was then viewed alongside the minutes from the March Fed meeting that showed the central bank expected “tighter credit conditions for households and businesses after the regional bank stresses, which would weigh on economic activity, hiring and inflation”. Markets initially viewed this as further evidence that a pause in rate rises would be around the corner.

Data remains split on whether the Fed will still raise rates in their next meeting in early May, with a 0.25% rate rise the most likely outcome. The current set of banking results in the US, led by JP Morgan today, will be a very interesting guide to the health of the banking sector and whether the Fed is about to shift from inflation control to price stability.

After a tricky February, it has been pleasing to see Chinese equities resume their recovery, particularly with regards to the rise of the consumer spend. Household deposits in China surged by more than a tenth of GDP over the past three years and now stand at over 100% of gross national income. Their capacity for some serious ‘revenge’ spending is not in doubt.

That Chinese consumers are eager to spend is equally apparent but, at least initially, the bulk of that spending is occurring at home. In February alone, 226m people travelled domestically, a 71% increase on the prior year. Internal tourism revenues jumped 30%. Cinema takings during the Spring Festival were the second highest in history. Shoppers also flocked to buy premium home appliances during that holiday: data from e-commerce platform JD and online retailer Suning showed sales of robot vacuums, blenders, dishwashers and giant TVs were all up between 120% to 500%.

For Beijing, this spending surge is doubly welcome. Not only does it boost recovery per se; it helps shift the economy away from its historic reliance on infrastructure investment that has too often been inefficient and just increased public sector debt. While infrastructure spending will remain significant, the focus is shifting from traditional assets like roads, buildings and airports to more ‘consumption-oriented’ facilities such as warehouses and data centres, 5G towers, hospitals and laboratories. There is expected to be a lot of spending to boost the energy transition.

This is being coupled with a more pragmatic and balanced policy stance towards the private sector generally and the technology sector in particular – affirmed by the recent ‘Two Sessions’, China’s yearly plenary meetings of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) to discuss and approve national priorities. Separately, the end of zero-Covid has also freed up resources. Put it all together and Beijing in 2023 is in a much stronger position: it should be able to support the economic recovery via focused spending and investment without having to deliver either broad fiscal or monetary easing.

Some of the pent-up demand from China’s consumers, meanwhile, will of course be spent abroad, travel, hospitality and luxury goods set to benefit most, but disproportionately in Asia. China’s reopening can certainly help support near-term resilience in global growth this year. However, the impact to global demand of China’s recovery will be different this time. The main driver of recovery is not investment but household consumption, which means less of an impact on worldwide commodity prices and inflation. This has already created new investment opportunities for us and we continue to monitor developments with great interest.

I do hope you have a good weekend.

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