The Point

Emerging markets: Why China is unlikely to face a Japanese-style ‘lost decade’ despite its cloudy outlook

There is a temptation to see China falling into the same kind of balance-sheet recession that Japan experienced after its late 1980s boom, says Pendal’s emerging markets team.

Japan’s Nikkei index has only just this year regained its 1989 peak after a series of so-called “lost decades”.

Given the historical pattern of a decade-long, debt-driven real-estate boom followed by what looks like a debt-deflationary slowdown, do Chinese equities also face a similar “lost decade”?

From beer to luxury products to cosmetics to cars, a clear pattern has emerged among western multinational companies warning about weak Chinese demand.

But a closer look at company results shows a different, more promising pattern, argues Pendal’s team in a new article.

Many Chinese domestic companies are reporting good results and earnings growth. Consensus estimates of future earnings are also being revised up.

There are opportunities to be found in Chinese equities, the team argues. “We remain overweight Chinese equities in the portfolio, with exposure to a highly selective set of stocks.”

Read more here

Elise McKay: What’s driving equities this week?

The world’s most-watched company, AI chip-maker Nvidia, tumbled this week after disappointing profit guidance and a regulatory speedbump.

Is Nvidia still a buy? And what do the results mean for ASX-listed, AI-related stocks?

Even before its latest share price tumble, Nvidia’s valuation wasn’t unreasonable at around 15 per cent below its five-year average multiple, says Pendal analyst and PM Elise McKay.

“Data-centre demand remains strong and broad-based across hyperscale (the biggest data-centre customers), consumer internet and enterprise,” says Elise.

Sales forecasts in the sovereign sector have strengthened to low double-digit billions in FY25, she points out.

“This reflects desire among sovereign states to build AI models based on local datasets, language and cultures.”

Nvidia’s profit margin guidance reflected the introduction of its latest “Blackwell” chips, which start at a higher cost before reaching scale during 2025, Elise says.

Strong growth in data centre revenue (154 per cent year-on-year) is supportive for ASX-listed plays such as Goodman (GMG), NextDC (NXT), Macquarie Telecom (MAQ) and Infratil (IFT), says Elise. (Pendal holds GMG, NXT and MAQ).

Read Pendal’s latest weekly equities overview

Crispin Murray: What’s driving the market this week?

MARKETS continued trailing back toward their July highs last week, driven by commentary from Federal Reserve Chairman Jay Powell.

Powell expressed confidence that a soft landing is achievable and said that the Fed would focus on keeping the labour market strong as it makes progress towards its inflation target.

The “Fed put” is back in terms of monetary policy, providing important insurance against recession risk.

US bonds rallied and the market is now pricing in a roughly 50% chance of a 50 basis point (bp) rate cut in September.

The US Dollar weakened, which is supportive for risk assets, and crypto rallied, indicating that liquidity is coming back to markets.

The S&P 500 gained 1.47%, while the S&P/ASX 300 finished up 0.90%.

The main check on equities is the fear of September, which is seasonally the weakest month.

Local earnings results remain supportive, albeit with some pockets of weakness which tend to reflect specific industry issues rather than broader economic malaise.

Crispin Murray: What’s driving the ASX this week?

Prevailing view or misconception? Pendal’s Amy Xie Patrick busts a few modern investing myths

The past few years have played havoc with conventional market assumptions.

Inverted yield curves don’t mean recessions are imminent. Expensive valuations can get more expensive. An aggressive hiking cycle need not bring about recession. Bonds don’t have to go up when equities go down.

These things can cause head-scratching among modern-day investors.

“But viewed through a longer-term lens – think multiple cycles and regimes – these events become clearer,” says Pendal’s head of income strategies Amy Xie Patrick.

In this article, Amy explains what’s really going on with these “broken relationships”.

For example, an inverted yield curve – when short-term interest rates are higher than long-term ones – is often viewed as a sign of a looming recession.

But history shows the lag between the curve inversion and recession is highly variable – three months to two years.

“It simply indicates the market expects interest rate cuts at some point down the line, and that current policy settings are restrictive and will be normalised – for whatever reason – in the future.”