Richard Turnill
Global Chief Investment Strategist
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock ...
Key points
- We see China’s growth edging lower next year but expect it to slow to solid and more sustainable levels supportive of emerging markets (EMs).
- Equities rallied, despite geopolitical noise. Japanese stocks hit their highest level since 1996. Eurozone industrial production came in strong.
- A coalition victory for the incumbent party looks likely in Japan’s Lower House election this week. U.S. third-quarter earnings season picks up.
China’s growth is set to cool in 2018 after a surprisingly strong year, and economic risks are rising. Yet the key party congress this week will likely serve as a prelude for deeper reforms. We see still-solid growth in China underpinning EM assets.
Emerging market equity earnings and China imports growth, 2005-2017
Sources: BlackRock Investment Institute, with data from Thomson Reuters and National Bureau of Statistics of China, October 2017.
Notes: Emerging market earnings are based on the annual change in aggregate analyst 12-month earnings-per-share forecasts for the MSCI Emerging Markets Index. The China imports line shows the annual change in the three-month moving average of the value of imports into China.
China’s growth acceleration (reflected in strong domestic demand in import data above) helped foster this year’s EM recovery, boosting EM earnings growth and equity outperformance. China’s recovery also coincided with a near perfect set-up for EM assets: a weaker U.S. dollar, falling bond yields, rising commodity prices and a more synchronized global expansion. Our BlackRock Growth GPS for China still points to steady growth in 2017. Sustained, above-trend global growth also helps underpin China’s key exports. China’s growth may come off slightly in 2018, but we expect growth at levels that should still be positive for EMs and risk assets globally.
Prioritizing reform
The road ahead for China and EMs may be bumpier than this year. Chinese President Xi Jinping is widely expected to shake up the ruling Politburo and bring in more allies at the twice-a-decade Communist Party congress that sees a reshuffling of most officials. This will give Xi greater sway to chart the country’s course over the five years of his second term. He is likely to speed up work on his key initiatives: further cleaning up bloated state-owned enterprises and delicately cutting down on the country’s reliance on debt to boost growth. Supply-side reforms played a role in this year’s surprise Chinese economic rebound that boosted commodity prices and industrial profits, lifting growth back near a 7% annual pace. Some of that one-time boost has faded. Yet supply-side reforms, coupled with tighter environmental regulations, are spreading to a wider range of industries plagued by overcapacity.
The risk to our thesis is a sharper slowdown once the desire to prop up growth and ensure a smooth party congress begins to fade. Bank lending and credit are cooling – the result of a healthy move to crack down on shadow banking and leverage. Trade relations with the U.S. may come under strain, in part due to the tensions with North Korea, and hurt exports. Regulatory moves to take some steam out of the frothy housing market may cause a downturn in construction activity. A rebound in the U.S. dollar could spur renewed capital outflows and put the People’s Bank of China in a tricky spot managing the currency and economy. This all comes as China attempts to shift its growth mix to one that is more consumer-led and less reliant on infrastructure investment. Our bottom line: We believe China’s growth rate will slip to still-solid and more sustainable levels. That should remain a positive for EM assets and risk assets, even if the sailing is unlikely to be as smooth ahead.
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| Date: | Event |
|---|---|
| Oct. 17-18 | U.S. industrial production, Beige Book |
| Oct. 18-19 | China Party Congress, retail sales, industrial production, Q3 gross domestic product |
| Oct. 22 | Japanese Lower House election |
Companies representing 15% of S&P 500 Index market capitalization will report third-quarter earnings this week. Results in many sectors are likely to reflect the impact of recent hurricanes, so management guidance will be in focus for assessing corporate strength. Opinion polls suggest the most likely outcome of the Japanese election is a victory for Prime Minister Shinzo Abe’s incumbent LDP party in coalition with the Komeito party – and the party may even retain its two-thirds super majority.
- Minutes from the Federal Reserve’s September meeting revealed a committee torn between disappointment in inflation and a desire to proceed with monetary policy normalization. Core U.S. inflation rose less than expected last month.
- Global risk assets rallied, looking past geopolitical noise. Japan’s Nikkei Index hit its highest level since 1996, while European stocks reached 10-year highs. Major U.S. banks beat on earnings and revenues, but shares fell amid higher-than-expected loss provisions.
- Eurozone industrial production exceeded expectations in August. Italy’s data were particularly strong. Spain gave Catalonia a deadline to retract its independence claim. Mexican assets came under pressure amid NAFTA talks.
Global snapshot
Weekly and 12-month performance of selected assets
| Equities | Week | YTD | 12 Months | Div. Yield |
|---|---|---|---|---|
| U.S. Large Caps | 0.2% | 14.0% | 19.7% | 2.0% |
| U.S. Small Caps | -0.5% | 11.9% | 25.3% | 1.2% |
| Non-U.S. World | 1.7% | 23.8% | 25.1% | 2.9% |
| Non-U.S. Developed | 1.6% | 21.8% | 24.4% | 3.1% |
| Japan | 2.0% | 17.4% | 18.0% | 2.1% |
| Emerging | 2.1% | 33.0% | 29.3% | 2.4% |
| Asia ex-Japan | 1.8% | 36.4% | 30.2% | 2.3% |
| Bonds | Week | YTD | 12 Months | Yield |
|---|---|---|---|---|
| U.S. Treasuries | 0.5% | 2.5% | -0.7% | 2.3% |
| U.S. TIPS | 0.6% | 2.2% | 0.3% | 2.5% |
| U.S. Investment Grade | 0.6% | 5.8% | 3.1% | 3.1% |
| U.S. High Yield | 0.0% | 7.2% | 8.6% | 5.5% |
| U.S. Municipals | 0.4% | 5.1% | 2.2% | 2.2% |
| Non-U.S. Developed | 1.2% | 9.2% | 1.1% | 0.8% |
| Emerging Market $ Bonds | 0.4% | 9.4% | 5.8% | 5.2% |
| Commodities | Week | YTD | 12 Months | Level |
|---|---|---|---|---|
| Brent Crude Oil | 2.8% | 0.6% | 9.9% | $57.17 |
| Gold | 2.1% | 13.6% | 3.6% | $1,304 |
| Copper | 3.2% | 24.3% | 46.1% | $6,882 |
| Currencies | Week | YTD | 12 Months | Level |
|---|---|---|---|---|
| Euro/USD | 0.8% | 12.4% | 6.9% | 1.18 |
| USD/Yen | -0.7% | -4.4% | 7.8% | 111.82 |
| Pound/USD | 1.7% | 7.7% | 8.4% | 1.33 |
Source: Bloomberg. As of October 13, 2017
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.
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