Asian stocks started on the back foot this week with US and European markets set for a soft open. Bond yields were trading slightly up and the dollar continues to hold near one-year highs.
Disappointing Chinese economic data and surging oil prices are the current sources of anxiety for investors. All data releases out of China today, except for retail sales, printed below analyst estimates. Third-quarter gross domestic product grew three tenths below expectations at 4.9%, September’s industrial production rose by 3.1% year-on-year versus an anticipated 4.5% increase, and fixed asset investments grew 7.3% for the same period, missing economist forecasts of 7.9%.
Power shortages, supply bottlenecks, tight credit conditions and the struggling real estate market are the main factors dragging on China’s growth. Elevated energy prices are not helping either with Brent crude trading near $86, the highest level since October 2018. Expect these factors to continue weighing on growth momentum for the next several months. That means policymakers in the world’s second largest economy need to take fast action to prevent further damage. However, any regulatory, fiscal or monetary support will take at least until the first quarter of 2022 to come to fruition.
Later this week, we will also get a snapshot of how supply bottlenecks and higher inflation are impacting developed countries’ economic activities. PMI readings for the eurozone, UK and the US will be released on Friday. It wouldn’t be surprising if the figures head south given the deteriorating sentiment around economic conditions.
Investors may need to prepare for wilder swings in markets if the combination of deteriorating economic data along with higher inflation and bond yields continue to hold. But the good news is that earnings of US companies remained robust heading into the third quarter. So far, 8% of S&P 500 companies have announced results for the third quarter with 80% beating EPS estimates. According to Factset, the estimated earnings growth rate is expected to be around 30%, marking the third highest year-on-year rate since the third quarter of 2010.
Given the many variables now impacting asset prices, investors need to be careful when it comes to stock picking. In such an environment of elevated inflation, companies that have the power to pass costs onto consumers while maintaining high profit margins tend to outperform the overall market. Therefore, it’s time to become more selective in one’s investment approach.
