Finimize - 🇨🇳 China's moving again

What’s going on here?

UK prices rose at their slowest pace in two years, so the writing on the wall may finally be optimistic.

What does this mean?

British prices were 4.6% higher this October than last, which plots inflation at twice the Bank of England’s (BoE) target. But Brits will take that: October’s uptick looks tame compared to September’s 6.7%, and marks the slowest pace of increases this year. What’s more, lower energy prices aren’t the only catalyst, with both core – excluding volatile food and energy prices – and services inflation landing lower than economists expected. And the British government will be celebrating, too, finally fulfilling the promise it made in January to halve inflation before the end of the year.

Why should I care?

For markets: Stocks are ready and waiting.

That slowdown didn’t come easily: the BoE pulled interest rates to extreme heights in an effort to curb inflation. So now that prices seem to be letting up, the central bank could consider cutting those rates – or at least leaving them where they are – to support the economy. Investors already believe the BoE will trim rates three times next year, starting from June. And that could help stocks dust themselves off: lower rates plump up the present value of stocks’ future cash flows, giving their valuations a leg up, while also making it cheaper for companies to borrow money and invest in themselves.

The bigger picture: It’ll be a bumpy ride.

Thing is, worldwide events like supply chain kinks and war were partly behind Britain’s price bumps. While that impact has mostly leveled out, the remaining inflation could be harder to budge. And even if prices stop climbing, their current level is enough to pinch workers without inflation-related pay rises. Mix in heating geopolitical tensions and transforming technology, and the takeaway is clear: the end of inflation doesn’t mean the end of volatility.

What’s going on here?

Chinese retail sales finally ticked up in October, so maybe the country ought to make its lucrative Golden Week public holiday a more frequent affair.

What does this mean?

China’s shoppers haven’t been generous lately, not least because falling property prices have undermined folks’ confidence in their biggest asset. But cheaper prices seemed to convince the country to spend last month: retail sales were over 7% higher in October than at the same time last year. (Mind you, those older figures were lower than usual, partly because the country skipped its money-making Golden Week holiday last year.) Industrial sectors – think mining, manufacturing, and energy – picked up too, making a better-than-expected 4.6% more of their goodies than the same time last year. That said, the ailing country’s far from recovered. Investment in fixed assets – physical items that businesses use in their operations – slipped below forecasts this year, pulled down by lackluster interest in the property industry. The central bank’s taking that seriously, pumping the banking system up with the most cash since 2016 to support the economy.

Why should I care?

The bigger picture: All problems are not made equal.

The Chinese real estate sector – with its debt-laden companies and empty apartments – could weigh on the country for up to a decade. But don’t count the whole country out for that long. Certain sectors are already recovering, and the companies within them could shake off their slump within a year. Tech giants Tencent and Alibaba will soon reveal whether they’re on track for that: they announce quarterly results later this week.

For markets: Everyone loves an underdog.

Analysts at UBS certainly seem to believe in China’s potential, predicting that the country’s stocks will beat Indian ones next year. That take goes against the grain, but since Chinese stocks are trading for way less than Indian equivalents, investors may well take the opportunity to lock in longer-term prospects at a discount.