César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
In a last-minute move, the heavily leveraged Chinese developer, Evergrande, made delivery on one of its overdue dollar bond coupon payments, thereby avoiding default by a matter of days. The story is not yet over however, given its next payment deadline is in November. Many Chinese officials have come out during the week to make reassuring statements and Chinese regulators have ordered some major banks to accelerate mortgage approvals for the remainder of the year. Chinese markets were given space to rebound as a result. In a move seen as a test of foreign sentiment toward Chinese assets, the government issued USD4 bn of debt at varying maturities, ranging from three to 30 years. The bonds were oversubscribed, a vote of confidence from international investors. Long-term Chinese growth issues remain however, and we are underweight Chinese equities.
The US earnings season has generally surprised to the upside so far, with cyclical and energy companies among major contributors to positive earnings revisions. However, third-quarter reporting has proven more lacklustre in Europe. Companies continue to reference supply and rising costs as their two foremost challenges. The ability to compensate for rising costs will be a key differentiator in performances across companies. We therefore like pricing-power companies. Meanwhile, in European politics, a “traffic light” coalition looking more likely to take shape in Germany would imply more green spending. We will be watching to see if an agreement is reached ahead of COP26 (starting next weekend), as both could have positive implications for our green Marshall Plan theme.
Taiwanese semiconductor manufacturer TSMC announced plans for a new USD9 bn plant in Japan and Toyota will build its first electric battery factory in the US. These moves point to a pick-up in corporate capital spending in the wake of the pandemic and reinforce our real assets theme. Last week, Russia’s central bank surprised markets with a larger-than-expected 75 basis-point (bp) rate hike. This is the latest example of a hiking cycle by emerging-market (EM) central banks that has been driving EM’s recent underperformance. Brazil’s central bank is also expected to raise rates this week. Finally, the resurgence of covid cases in some countries could lead to new restrictive government measures in the coming weeks, explaining why rises in long rates have been generally muted. However, we still expect the Fed to announce tapering plans in the coming weeks.
