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14 August 2023

Market Round Up

Economic data coming out of China last week pointed towards a fairly weak second quarter of the year, with gross domestic product (GDP) coming in below expectations. Similarly, Purchasing Manager Index (PMI) data, a measure of sentiment in the manufacturing and service sectors, indicated a prolonged contraction in manufacturing activity. Chinese leaders have signalled their willingness to implement domestic demand-inducing policies to help boost the economy, recognising the country’s slower than desired post-COVID recovery rate. Therefore, the question of whether China will reach its revised GDP growth target of 5% by the end of 2023 remains.

While the full extent of the fiscal package is yet to be seen, the focus looks to be on reinvigorating the property market by increasing the supply of affordable housing as the country continues to battle with affordability issues and wider headwinds. In the recent Politburo meeting, further measures were also announced including plans to boost demand across the automotive industry, particularly through supporting electric vehicle infrastructure, while also looking to provide aid to service sectors impacted by a slowdown in demand.

Despite the announcement being a step in the right direction for both the Chinese Government and the economy, many have viewed the package as disappointing, especially for investors who have been waiting patiently for some impactful news. Meanwhile, analysts have previously discussed how policymakers are unlikely to deliver any aggressive stimulus due to worries about growing debt risks. Although the announcement may have been slightly underwhelming, it didn’t stop investor optimism as China's leading indexes saw strong positive shifts in July.

In the UK, data from Halifax and Nationwide shows that average UK house prices declined in July, with the lenders reporting contractions of 0.3% and 0.2%, respectively. This is the fourth successive month marked by a fall in prices as demand begins to buckle under the current macroeconomic climate. High inflation and interest rates are the main culprits, with the latter rising to a 15-year high earlier in August, forcing mortgage lenders to follow suit with the average two-year fixed rate mortgage now above 6%. As a result, average monthly mortgage payments have increased significantly, discouraging many first-time buyers and causing the highest level of mortgage defaults since 2009.

Despite the gloomy tone, market experts deem the prospect of a sharp collapse in house prices unlikely, especially as fears of future interest rate hikes subside. Kim Kinnaird, Halifax Mortgage Director, remains hopeful in the housing market “which continues to display a degree of resilience in the face of tough economic headwinds”. Kinnaird points to high wage growth and a stabilisation of borrowing costs as the key factors keeping the price fall in check. Robert Gardener, Nationwide’s Chief Economist, also mirrors this sentiment, with the belief that “existing borrowers should be able to weather the impact of higher borrowing costs”.

Therefore, while there is a consensus that prices will continue to fall later into the year, the trend is unlikely to erase years of steady growth, with present prices still 19% above pre-Covid levels.

Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
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