Investment Newsletter – April 2023
In China’s Government Work Report on the National People’s Congress on 5 March, Premier Li Keqiang guided China’s GDP growth target for 2023 to around 5%, which is at the lower end of market consensus. With an incoming new administration, lower guidance sets the stage for stronger delivery later in the year. The appointment of new leaders at key government institutions, government institutional reform, and implementation of the pro-growth policies should drive growth momentum in the economy.
China’s latest data on factory output and retail sales suggest its economic recovery from the pandemic is on the right track. That means the PBOC is walking a fine line, while the central bank has to pump in enough cash to fund growth, at the same time, it also needs to avoid too big a policy divergence from global peers. Currently, the growth outlook remains uncertain, giving China policymakers reason to add liquidity support. Hence, the liquidity injection reflects the ongoing need to support the economy, despite recent sentiment and loan data improvement.
The Federal Reserve is desire to get inflation to its 2% target. If Fed was to pivot by as much and as soon as the market predicts, something has broken. Currently, it would take a severe negative turn to the credit crisis or a rapidly deteriorating economy to justify a pivot, the likes of which markets imply. There is one more point worth considering regarding a Federal Reserve pivot. If the Fed cuts Fed Funds, the yield curve will likely un- invert and return to a normal positive slope. Historically yield curve inversions, as we have, are only recession warnings. The un-inversion of yield curves has traditionally signalled that a recession is imminent.
“With economic uncertainty, slow return-to-office utilization, and an ongoing correction in the technology sector, it is no surprise that the San Francisco office market has gone from having the lowest availability levels in the country pre-pandemic to having the highest availability levels in just over three years,” Savills stated in its report. San Francisco’s soaring vacancy levels, which Savills terms availability, mean that loans for big office buildings in that city could tumble into default — or worse, into foreclosures and property seizures. “With worsening underlying market fundamentals and looming loan maturities, expect more (San Francisco) office property distress to occur in 2023 as many owners find themselves underwater,” Savills stated. A commercial real estate site would be considered “underwater” if its total loan debt exceeds the actual value of the building.
