Active Thinking

At GAM Investments’ latest active thinking forum, David Dowsett discusses recent market moves, as well as the importance of the upcoming Chinese Communist Party Congress in setting the Chinese policy agenda.

12 October 2022

Last week began strongly when slightly weaker data, particularly in the US, led to speculation about when the Federal Reserve (Fed) might pivot. Later in the week, however, we saw somewhat stronger data and comments from the Fed which dashed hopes of an imminent pivot. To illustrate this, using the S&P 500 as the basic denominator, the index was up more than +5% in the first two days of the week but ended the week at +1.5%. Bond market trading was equally volatile. These moves are in contrast to September when all assets fell consistently. We believe this volatile trading is likely to characterise the next few weeks as we also expect data to become increasingly two-way. We are not yet at the end of the interest rate hiking cycle but there will be increased speculation over time as to how many more interest rate hikes there are to come, which will significantly shape the markets we are trading in. The most important focal point this week will be the US CPI data release, which could lead to significant market volatility.

Many of our fixed income portfolio managers have been very cautious on duration throughout the course of the year, as well as cautious on risk markets as a result, but that view is beginning to balance not only because of the yield levels that we are reaching in core markets but also because of the value that is being created in riskier markets. Our investors recognise there is a growing penalty for being underweight duration, owing to the significant rise in yields. This is an important first step as ultimately, we have to see some stability in fixed income before we can begin to build gains in equities and other risk markets.

The Chinese Communist Party Congress begins later this week, which will be crucially important in setting the Chinese policy agenda for the next few years. There is no fully formed consensus as to what will come out of the China Congress but the market generally would like to see more policy direction. Over the last two years, the focus has been almost entirely on zero-Covid and therefore any direction on real estate, on how China will reenergise growth and deal with bad debts belonging to state-owned enterprises, all of which have fallen by the wayside, will be welcome. We think this is a realistic expectation.

In recent days, we have also seen US curbs on Chinese access to semiconductor technology which has led to falls for semiconductor stocks in China, some of which have followed through to the US. We regard this as a continuation of the deglobalisation trade which is manifesting itself, but which does not necessarily have to be bad for markets.