European espresso: the rate-cutting cycle could be good for European equities
As part of our Espresso series, providing an expert blend of views on European equities, Portfolio Manager Robert Schramm-Fuchs explains why he believes a trend of fiscal and monetary easing measures globally could be positive for European equities.
3 minute watch
Key takeaways:
- Recent weeks has seen significant market-moving changes, with important monetary and/or fiscal policy easing changes in the US, Japan and China.
- Changes in the US and Japan took pressure off the Chinese central bank, which responded with a co-ordinated range of monetary and fiscal measures, and guidance on further plans.
- We think that is great news for European markets, which have a greater exposure to global factors, versus domestic demand. A co-ordinated global macroeconomic cycle upswing could represent a healthy tailwind for European equities.
Hi everyone. Now we thought it was worthwhile doing a quick video because we have had significant market-moving events in the past few weeks. Strangely, they all come from other parts of the world, but they mostly affect the European equity market.
Yet the US Federal Reserve bank initiated a significant interest rate cutting cycle, with guidance for more than the 50bps cut, and we had the Bank of Japan easing off its aggressive rate hike cycle guidance. These two things are actually the most important for China to orient its monetary policy on. Taking the pressure off like that gave the Chinese central bank much needed breathing room to initiate monetary easing, without worries about capital outflows or undue currency depreciation.
Consequently, without delay this week, China is following a number of monetary and fiscal easing measures. Now many market participants are saying this won’t be enough for the Chinese economy, but we disagree. Because we think it is quite rare to see a simultaneous cut of all the policy interest rates, and the required reserve rate (which is essentially how much lending banks can do). It is rare to see such a large magnitude of cuts. Thirdly, it is rare to see such unusual guidance on further policy measures to come.
Moreover, it is now followed by fiscal policy measures. This coordination between monetary and fiscal is also something we haven’t seen in recent years. We had the financial cash handout to poor people. We had a number of property market loosening restriction measures. There has been easing in local government bond issuance measures, purchase commitment for the stock market, recapitalisation investment into banks, etc. Overnight, Chinese state media reported of further measures that are expected over the coming weeks.
Now we think that is great news for European markets. And the reason is that European markets are essentially driven by more export-oriented, more by what is going on in the rest of the world. It is just a much higher exposure of export versus domestic demand. And typically, European equity markets tend to do best (ie. see a supportive market environment) when we are in a more co-ordinated global macroeconomic cycle upswing, that we think we might be on the cusp of right now.Â
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Basis point (bps): One basis point equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.
Fiscal policy: Describes government policy relating to setting tax rates and spending levels.
Macroeconomic: The domain of large-scale factors related to the economy, such as inflation, unemployment or productivity. A macroeconomic upswing would be one where indicators are improving across a range of broad metrics, generally leading to more positive sentiment.
Monetary policy: The policies of a central bank, aimed at influencing the level of inflation and growth in an economy. Monetary policy tools include setting interest rates and controlling the supply of money. Monetary stimulus, or ‘easing’ refers to a central bank increasing the supply of money and lowering borrowing costs.
Rate-cutting cycle: The part of the monetary policy cycle when central banks are cutting interest rates.
Rate hike cycle: The part of the monetary policy cycle when central banks are increasing interest rates.
Reserve rate/ratio: A regulatory requirement typically imposed by a central bank that sets the minimum amount of cash reserves that a bank must hold relative to the amount that it lends. It is a monetary policy tool used to increase or decrease the money supply, as well as to ensure that banks retain sufficient money on hand to meet the needs of depositors.
3 minute watch
Key takeaways:
- Recent weeks has seen significant market-moving changes, with important monetary and/or fiscal policy easing changes in the US, Japan and China.
- Changes in the US and Japan took pressure off the Chinese central bank, which responded with a co-ordinated range of monetary and fiscal measures, and guidance on further plans.
- We think that is great news for European markets, which have a greater exposure to global factors, versus domestic demand. A co-ordinated global macroeconomic cycle upswing could represent a healthy tailwind for European equities.