Investors faced with budgets and elections galore may be pondering how impactful political intervention is on the markets.
However, the recent intervention by Chinese policymakers has proved particularly potent, with the country’s equity market rising by around 8 per cent in a single day.
The market was responding to announcements from policymakers in China that both fiscal and monetary stimuli would be forthcoming in order to help the economy achieve an annual growth rate of 5 per cent.
Government stimulus is typically divided into two categories, fiscal and monetary.
Fiscal stimulus revolves around increased government spending in order to stimulate private sector demand, while monetary stimulus involves increasing the supply of money in the economy.
This latter would be expected to boost property assets, bonds and equities immediately.
BRI Wealth Management chief executive Dan Boardman-Weston says while the stimulus had an immediate impact on asset prices, some of the gains were later reversed and he is concerned about the potential for the stimulus to have a material impact on the economy.
His thinking centres on the problems of the property sector in China.
“Fiscal stimulus probably puts money in people’s pockets, but the problem is that for stimulus to work you need consumers to be confident, and the sharp decline in house prices hurts that because consumers feel poorer,” he says.
Boosting consumer confidence
Gerard Lyons, chief economic strategist at Netwealth and independent non-executive director at the Bank of China (UK), recently returned from the country where he attended a board meeting and met policymakers.
He says the monetary element of the stimulus will boost real estate prices and this may bolster confidence sufficiently so that the fiscal policy has a positive impact and consumer spending rises.
Lyons says this is “the purpose of the stimulus”.
It is the lack of detail around the fiscal stimulus that is concerning analysts at Edmond De Rothschild.
Chief investment officer Benjamin Melman says the details around any fiscal stimulus will not be announced until after the US presidential election, and so there remains considerable uncertainty around whether any fiscal stimulus can address the issues within the economy.
He adds that the “structural” issues within the Chinese economy mean a fiscal stimulus will be needed, and not just a monetary response.
The extent of those issues can be seen within the data, with consumer confidence low and purchasing managers' index data pointing to continued contraction.
“People are too inclined to focus on a 0.1 per cent movement in GDP, which isn’t particularly important, but there are issues around the property market, the health of the consumer and demographics,” says Lyons.
“Policymakers in China are aware of these issues and are focused on the task of moving the economy to a slower level of structural growth."
