China adds to growth concerns as global outlook weakens

Investors waiting for lower share prices to add to portfolios may yet be rewarded.

Australia’s market has been well supported on dips in recent days. It is also likely to benefit from a flood of cash from dividend payments, share buybacks and takeovers in the coming months. Picture: NCA NewsWire/Nikki Short

Investors waiting for lower share prices to add to portfolios may yet be rewarded.

China’s weaker than expected economic data and the increasing risk of collapse in its biggest property developer added to jitters about the global outlook, while lower than expected US inflation raised concern about corporate profit margins but didn’t dispel expectations of Fed tapering.

To be sure, Australia’s market has been well supported on dips in recent days. It is also likely to benefit from a flood of cash from dividend payments, share buybacks and takeovers in the coming months.

But while global markets are jittery as they often are at this time of year, investors may hold back. Despite a 0.7 per cent fall in the S&P 500 on Tuesday, Australia’s ASX 200 share index finished just 0.2 per cent lower at 7417 points on Wednesday after hitting a three-day low of 7378.9.

Signs of resilience in the Westpac-Melbourne Institute Consumer Confidence Survey for September, a stabilisation of NSW Covid case numbers and the lifting of curfews in Sydney appeared to help the property trusts in particular, albeit the consumer discretionary sector and banks struggled.

While they contributed heavily to a 73 per cent rise in the ASX 200 from March 2020 to August 2021, the banks have drifted sideways for the past few months.

CBA topped out at a record high near $109 after its results – and it remains to be seen if NAB can sustain its new-found strength above $28 amid mixed reports from analysts.

Thursday’s release of August employment data will also be eyed by investors gauging the impact of Covid lockdowns. Bloomberg’s consensus estimate is for an 80,000 fall in jobs.

A fall in the participation rate is expected to limit the unemployment rate to 5 per cent.

But on a day when Singapore iron ore futures dived as much as 5.6 per cent to a nine-month low of $US113.95 a tonne as China’s industrial production data showed crude steel output slumped 13.2 per cent on year to just over 82 million tonnes, the biggest fall since March 2020, amid China’s ongoing drive to cap steel output as its 2021 level – the resilience of Australian shares was impressive.

Still, BHP did fall 3.5 per cent to a nine-month low of $40.26 – down 26 per cent from a record high of $54.55 on July 30 – and Rio Tinto and Fortescue remained heavy after breaking chart support levels in recent weeks as iron ore prices dived.

There’s been no slowdown in the fall that’s wiped 44 per cent off iron ore price in just two months.

A potentially bigger risk is the growing risk of collapse of China’s Evergrande Group causing a contagion effect across markets.

The troubled property titan has warned it may not be able to service its colossal debts, seeding panic across property buyers, bond holders and contractors, and fanning fears of a default that could ripple through the world’s second-biggest economy.

The Hong Kong-listed developer reportedly has more than a million units prepaid but yet to be built.

The company said it was under “tremendous pressure” and may not be able to meet its liabilities and Bloomberg cited unnamed sources saying Evergrande can’t pay interest due next week.

China’s Ministry of Housing and Urban-Rural Development told banks Evergrande would not be able to make loan repayments, but was still talking to lenders about extending payments and rolling over some loans.

As usual in China, the assumption remains that Beijing will act to avoid a disorderly collapse.

“An Evergrande default could damage consumer confidence if it were to affect households’ deposits for homes that have not yet been completed, but we assume the government would act to protect households’ interests, making this outcome unlikely,” Fitch Ratings said.

Chinese indicators like electricity output growth, which slowed sharply to 2 per cent from 11.5 per cent, and growth in floor space sold, which plunged to 19.4 per cent, backed the weakness in retail sales and industrial production.

“Overall, the data are consistent with coronavirus concerns, lockdowns and floods significantly impacting consumers over and beyond structural issues like over-indebtedness and unfavourable demographics,” said Credit Suisse macro strategist, Damien Boey.

He said China’s property sector crackdowns also appear to be having a domino effect on the broader financial system and may even be compounding consumer woes, and the manufacturing sector had increased its dependence on stimulus and foreign demand.

Still, he maintained that the best leading indicator of the cycle in China’s property demand-to-supply balance was the economy’s credit impulse, which appeared to be stabilising as policy makers entertain easing amid slowing growth and disinflation.

“Even from the perspective of the ‘common prosperity’ agenda, we note that there is already disinflation – if not deflation – in train for the property market, consistent with improving affordability in the period ahead and greater scope for authorities to soften their stance,” he said.

He felt that China’s property market weakness threatened the integrity of the financial system and could ultimately cost jobs, and that the property market was “badly undershooting the path traced out by financial conditions and could easily rebound if authorities show easing intent”.

He said iron ore was becoming oversold. But in the short-term, prices approaching $US100 a tonne were likely to wipe out a chunk of the 15 per cent growth in ASX 200 earnings that’s priced in for FY22.