China macro

We knew April would be bad. And, it was.

Retail data is much more deeply depressed than measures like fixed asset investment, as China (for decades now) prioritises supply side stimulus measures over ones that would bolster domestic demand.

As productive investment in fixed assets probably peaked 20+ years ago, and has been declining ever since, such stimulus (like those you’ve probably been reading about in the Financial review) measures produce very little additional output. As such, China’s debt to GDP ratio continues to climb.

Given that the especially bad data is a function of lockdowns, which in turn are presumably temporary (despite having dragged on for many days now) there isn’t much to move our pre-existing views either way.

We continue to see China as imbalanced, and in need of structural reform (specifically aimed at increasing the household share of income), which will eventually require investment to decline as a proportion of GDP, and thus, as we anticipate eventual long run weaker demand.

Hence we are bearish on raw materials (commodities) and their Australian producers, particularly given elevated pricing.

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Please note that past performance is not a reliable indicator of future performance.

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