"China has what might be called a balance sheet recession, with house prices down around 20 per cent. And home ownership is huge there, around 96 per cent own their own home, and many are also invested in property more generally as there isn’t much else to invest in.
"Previous stimulus efforts have focused on cutting interest rates, but those aren’t really a cure for balance sheet recessions, as people don’t want to take on more debt, they want less debt, and people don’t want to buy more property, they want less property. But the recent stimulus is on the fiscal side, that is a game changer."
He adds many unanswered questions remain, for example for a fiscal stimulus to be effective in an economy, traditionally consumers have to feel confident in their economic prospects, if they do not then the instinct will be to horde the cash.
Miller’s view is that for the stimulus to be effective, “house prices will have to stabilise and eventually start to rise. A consumer receiving a boost from the stimulus but with their house having fallen in value by 20 per cent, they may not feel wealthier.”
But he notes the focus of the Chinese government on achieving economic growth is itself a positive and likely to boost equities.
He says: “I think some of the gains in Chinese equities recently have been over done, but on a six or nine-month basis, the opportunity for investing in Chinese equities is strong.
"The Chinese economy doing well boosts all parts of the world as China is a big consumer economy, not just a big export economy. And because China is such a big part of the emerging markets index, obviously clients who invest in that way will benefit. More broadly, lower interest rates should help emerging markets.”
Templeton's Seghal has been taking some profits on his Chinese investments during the recent market rally.
He says that looking at the emerging market index performance in recent years could create a misleading impression. Seghal adds many emerging markets delivered strong returns, but the performance of Chinese stocks dragged down the index as a whole.
With Chinese equities now recovering somewhat, he is deploying the capital into markets he considers to be cheaper, such as Korea and Latin America.
Many Latin American equities performed well in the immediate aftermath of the Covid-19 pandemic as those economies are commodity exporters, and so benefitted from higher inflation and commodity prices, but more recently commodity prices have fallen as consumers and businesses have moved away from buying goods, and towards services, denting demand for physical commodities.
