Stimulus expected in Chinese equity markets

A large fiscal programme can be expected in China says Mark Harris, head of multi asset at City Financial.

Stimulus expected in Chinese equity markets

China is experiencing a hard landing and the Chinese equity market now reflects this issue to a major extent.

We maintain that their credit issues can be contained but more extreme stimulus measures will be deployed, including a large fiscal programme. The market now appears to be base building for a more sustainable but lower trajectory rally.

Equity market rallies have  been led by participants focusing on highly liquid large cap indices and the beneficiaries of stimulus. For this to be a sustainable rally, we would now expect to see a broadening of stock participation.

We are very conscious that we should not become entrenched in an overly bearish view. As a result, we have maintained some tail risk hedging but increased our positioning in the laggard areas of equity markets such as mid and small caps that should now lead.

Away from equities, we have been warning for some time that many emerging market bond and credit markets are likely to suffer as countries and companies struggle with the effects of the strong US dollar, weak global growth and weak commodity prices. It is evident that issuance of local and hard currency debt in Emerging Markets has markedly increased in recent years, with domestic loans and locally issued bonds of companies ex China moving up from $3.5tn in 2008 to $6.3tn currently.

It is no surprise that the International Monetary Fund has issued a double warning over higher US interest rates, which it said could trigger a wave of emerging market corporate defaults and panic in financial markets as liquidity evaporates.

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