Weekly Wisdom – October 3, 2024

By Hightower Great Lakes on October 3, 2024

Hopes to Revive the Chinese Economy

Last week, China released the most extensive stimulus package since the pandemic. The country has faced many difficulties in recovering from Covid-induced shutdowns and following the start of the Federal Reserve’s new easing cycle, China has decided to embark on its own liquidity program to bolster the economy.

Short-term interest rates were cut to entice borrowing, and the reserve requirement ratio (RRR) was lowered by 50 basis points (bps), shoring up 1 trillion yuan ($142 billion) of new lending capabilities.

Existing mortgages received a 50 bp interest rate reduction and the minimum downpayment on all homes was lowered to 15% from 25%. The interest rate deduction for mortgage owners is expected to save over 50 million households up to 150 billion yuan ($21 billion) in interest payments per year and affect up to $5.3 trillion in existing mortgages.[1]

Additionally, the People’s Bank of China (PBOC) introduced a swaps program of up to 500 billion yuan to allow easier access for major funds, insurers, and brokers to finance stock buybacks.

The PBOC and Chinese government are hoping these measures will help revive its shallow economy. China’s consumer confidence is near an all-time low, home prices fell 5.7% in August (the fastest rate in nine years), and the economy is unlikely to hit its goal of 5% GDP growth this year.

One of the region’s largest concerns is its real estate market. Since the start of China’s property crisis in 2021, it is expected that $18 trillion in household wealth has vanished, about $60,000 per family.[2]

But even more murky, Goldman Sachs has reported that the total value of unsold homes, unfinished projects, and unused land in China is worth 30 trillion yuan ($4.1 trillion).[3] Two major property developers went bankrupt last year and the sector has been unable to recover ever since.

Inflation is also a concern for the Chinese economy. Core consumer prices grew 0.3% in August, the lowest in three years, as consumers have held back on spending amid economic uncertainty.

Companies such as Louis Vuitton (LVMUY) were once highly favored in China and have underperformed due to weak demand in the region. Investors are hopeful that last week’s policy changes will improve consumer sentiment and demand and turn the country’s troubles around.

Chart 1: China’s Most Aggressive Stimulus Package Since 2020[4]

Market Rally on the Release

Global markets surged on the news. Chinese stocks had their best day in 16 years on September 30, rising over 8%. The Shanghai Composite Index (SSEC) was up over 20% in the five-day trading period following the announcement, the largest gain over the given period since 1996.[5]

Investors are hoping this is not the end of China’s efforts to support the economy. We believe we are in the first inning of stimulus and that more will be done to improve its economy this year.

The Chinese government is in a “whatever it takes” moment to combat its slow growth – to the point of providing lending to companies to buy back stock. Our preference is to own U.S. multinational companies with exposure to China rather than Chinese pure plays because U.S. companies have better transparency and less political risk.

China-exposed companies are up double digits in the last five trading days alone.[6] Many of these names have performed poorly this year and are still underperforming indices year-to-date (YTD). For example, Las Vegas Sands (LVS) is up 29% in the last month, but up only 2.3% YTD.[7]

Chart 2: China-Exposed Companies and ETFs Are Up +15% in Five Trading Days[8]

Our China Exposure

We maintain positions in a number of companies with China exposure. Also, we added to many names over the last week looking to gain more exposure to the rebound in activity across the country. As stated previously, we expected more stimulus to be supplied to the Chinese economy.

LVS is a name we added to in the last few days. It has exposure to both Macau and Singapore, 63% and 37% of its revenue respectively. The Singapore region saw 18% adjusted property EBITDA growth in Q2, and that is on top of 55% growth the previous year.

Macau’s extensive investment into its properties has impacted market share over the summer and is expected to be operating at full capacity by Q1 2025. LVS is trading at a 50% discount to its three-year average price-to-earnings (P/E) ratio.

Freeport-McMoRan (FCX) is a global leader in copper mining, and China consumes about half of the world’s copper. An increase in economic activity in the region will lead to more demand for copper and commodities. FCX has exposure to housing, electric vehicles, construction, and artificial intelligence as these industries need copper to produce new technologies and infrastructure.

LVMH Moet Hennessy Louis Vuitton (LVMUY) generates ~40% of its revenue from the Asia/Pacific region and has become historically cheap on a relative valuation basis over the last few months amid China weakness.

LVMUY was up 18% last week on the China stimulus news in hopes that the country’s consumer base will return to luxury products. LVMUY owns companies such as Louis Vuitton, Tiffany & Co, Sephora, Zenith, and more.

Many other companies we own have China exposure, with 31% of Broadcom’s (AVGO) revenue coming from China, 40% of Lam Research’s (LRCX), 18% of Apple’s (AAPL), 18% of Dupont de Nemours’ (DD), 14% of Nike’s (NKE) and 13% of GE Healthcare’s (GEHC) revenue.

All these companies are likely to see a gain from a strengthening Chinese consumer and economy, with our expectation for more stimulus to come later this year.

Click here to read last week’s Market Note (9/26).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Reuters. As of September 24, 2024.

[2] Source: WSJ. As of of September 24, 2024.

[3] Source: CNN. As of May 21, 2024.

[4] Source: Bloomberg. As of September 24, 2024.

[5] Source: Reuters. As of September 30, 2024.

[6] Source: FactSet. As of September 30, 2024.

[7] Source: FactSet. As of September 30, 2024.

[8] Source: FactSet. As of September 30, 2024.