Unpacking the latest growth numbers from China

April 26th 2023

Executive summary:

On the latest edition of Market Week in Review, Investment Strategist Alex Cousley and Equity Manager Research Analyst Michelle Batjargal discussed U.S. first-quarter earnings season and the economic rebound in China.


Forward guidance, profit margins under the microscope as Q1 earnings season continues

Batjargal and Cousley started their conversation by assessing the latest trends from first-quarter earnings season, including earnings, revenue and forward guidance. Cousley said that big banks, which were among the first to report results, have generally surpassed analysts’ expectations and also provided reasonable forward guidance. He noted that the week of 24 April will be a crucial watchpoint for investors, as a slew of big tech companies including Microsoft, Google, Meta and Amazon are due to report results.

Cousley said that as more companies report, two key areas of focus are likely to command investors’ attention: forward guidance and profit margins. “Right now, markets are anticipating that first-quarter earning season will be the low point of the year for companies, with earnings growth bouncing back to 10% on a year-over-year basis by the fourth quarter. This doesn’t really jive with the elevated recession risks I’m seeing later this year and so forward guidance from companies on earnings, and how they view the U.S. economy, will be particularly interesting,” he remarked.

Company profit margins will also be under the microscope this earnings season, Cousley said, noting that they still remain quite high. “The sustainability of profit margins this year is really going to guide where any risk to corporate earnings lies and I think there still is some downside risk, particularly to consensus estimates,” he concluded.


Could China achieve 5% growth in 2023?

Pivoting to China, Batjargal asked Cousley how the country’s latest economic data, including GDP and credit numbers, is stacking up against expectations. “Overall, I’d say that the numbers have been a little bit better than expected,” he responded, adding that he thinks 5% GDP (gross domestic product) growth is probably an appropriate forecast for China this year.

Cousley said that historically, the key drivers of growth in China have been construction, infrastructure and exports. Each has been a bit constrained so far in 2023, he noted, due to the slowdown in global growth and the government’s preference to not let property construction rapidly expand. This has made the growth story for 2023 all about the consumer, Cousley said, explaining that China has been trying to transition away from being a capital-intensive economy to a consumer-led economy. “So far, there’s some pretty encouraging evidence that this is working, including March’s 10.6% year-over-year jump in retail sales,” he stated.

However, Cousley cautioned that it’s still a little too early in the game to declare that consumer spending in China has returned to pre-COVID-19 levels. He explained that a lot of the recent strength in spending such as restaurant spending can be linked to the widespread reopening of the Chinese economy over the last several months. “In other countries that reopened after COVID-19 lockdowns, restaurant spending was elevated for a few months before fading as people returned to more normal levels of dining,” Cousley observed.

He said that a key focus for Chinese growth this year will revolve around the status of the country’s housing market, which has been battered in recent years. Right now, there are some early signs that the real estate market is stabilising, Cousley stated, adding that the overall picture is still very messy. “If the housing market does stabilise, that would allow consumer confidence to really bounce back up. This, in turn, could unlock excess savings built up among consumers during the pandemic,” he remarked.

Cousley said that beyond the housing market, questions also remain about whether the Chinese government will provide more stimulus to further boost the economy. In his opinion, the possibility of more stimulus measures particularly on the fiscal sides probably limited due to the better-than-expected growth numbers.

Cousley wrapped up the segment by noting that monetary policy in China will remain very accommodative this year, due to low inflation and no real desire to slow down credit growth at the moment.


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Source: Russel Investments

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