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Growth Team Weekly Investment Insights

This week's post highlights Chinese stimulus measures and equity returns, US economic data releases (PCE and GDP), how rare it is to find companies with consistent growth profiles, and the importance of digital innovation in cars. 

China Stimulus Fuels Sharp Rally

Last week, Chinese equities had their strongest week in a long time due to a series of stimulus announcements to combat decelerating growth caused by property market challenges and poor consumer sentiment. Setting the stage for this was the US Federal Reserve’s move to cut its benchmark interest rate by 50bps, alleviating China’s concerns about currency pressures and giving the PBoC more room to maneuver.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This Financial Times article outlines the stimulus measures. To summarize, efforts include:

• Reducing the central bank’s primary policy rate from 1.7% to 1.5%.
• Cutting the reserve requirement ratio for lenders by 0.5% while signaling a further potential cut of 0.25% to 0.5% this year.
• Offering Rmb 500bn to help brokers, insurance companies and funds buy stocks.
• Providing Rmb 300bn to help companies conduct share buybacks.
• Lowering mortgage down payments for second homes from 25% to 15%.
• Improving the terms of a Rmb 300bn program to help local government-owned enterprises buy unsold inventory from property developers.

Looking at the YTD performance of MSCI indices, the broader MSCI AC World Index went from outperforming the MSCI China Index by 11.4 percentage points to trailing by 4.6 percentage points over the last week!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Within the MSCI China Index, it is not surprising that industries most leveraged to the property market or improved consumer spending fared the best last week.

 

 

 

 

 

 

 

 

 

 

 

Given China’s importance to the world economy, many other market areas benefited as well. For example, luxury goods companies with sizable revenue exposure to China rebounded. Commodity markets such as iron ore, copper and aluminum also rose.

US Soft Landing Data Points

Multiple data points within the United States continued to support the soft-landing optimism. From a falling inflation perspective, the August personal consumption expenditures index (PCE) was up 2.2% YoY and 0.09% MoM. Both of which were below expectations and the prior month’s readings.

 

 

 

 

 

Looking a bit closer at PCE index components, elevated inflation pressures persist in the services sector, largely within housing, while goods prices have been falling.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

From an economic growth perspective, second-quarter GDP rose at a 3.0% annual rate, an acceleration from the upwardly revised 1.6% pace for the first quarter.

 

 

 

 

 

 

 

 

 

 

 

 

 

Another interesting part of the report was the historical revisions, particularly the second quarter of 2022. If you remember, we had back-to-back negative GDP readings, which triggered a technical recession. However, the second-quarter number was revised from -0.6% to 0.3%.

The Search for Multi-Year Compounders

When looking through history, it is rare to find companies that can sustain attractive growth rates year in and year out. Many companies experience strong growth for one or two years, but the numbers drop drastically beyond year two.

The chart below utilizes annual sales growth numbers for all constituents within the MSCI AC World Index from 2018 through 2023, sourced from FactSet. This range is particularly interesting because it covers the years before, during and after the pandemic.

The bogey to hit was >10% growth. The data shows that over 1,000 companies experienced growth of >10% in 2018, but only 35 of those companies were able to sustain that level of growth each year through 2023.  

 

 

 

 

 

 

 

 

 

 

 

 

 

The Digital Arms Race in Cars

This article from the Financial Times outlines the latest ranking of auto groups’ digital performance from consultancy Gartner. Overall, it shows how the large internal combustion engine players in the industry have struggled to keep pace with the technological advances of electric vehicle (EV) competitors, where the focus has turned from superior engines to software that will control everything from batteries and safety features to self-driving technology and connectivity.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What makes software exciting is the potential to drive more revenues from collecting user data and offering subscription services with a monthly fee. This is appealing for companies grappling with higher development costs and lower margins for EVs.

According to Accenture, digital services only generate about 3% of global carmaker revenues. However, they project this could expand to nearly 40% by 2040.