By Dorval AM

The Chinese authorities took advantage of the favourable context created by the Fed’s rate cut to announce a “whatever it takes” plan to support growth. In Europe, the spread of disinflation is increasing the ECB’s room for manoeuvre, which should accelerate its interest rate cuts.

In the latest edition of its economic forecasts, the OECD describes a positive scenario for continued global growth of 3.2% in 2025, as in 2024, based largely on the gains in purchasing power made possible by disinflation and the effect of lower interest rates. But in the minds of investors, the credibility of these projections remains highly dependent on the authorities’ ability to contain the risk of unpleasant surprises. The slowdown in the US labour market, Chinese real estate deflation, near-stagnation in Europe and the sluggishness of the global manufacturing industry all call for counter-measures.

After the Fed cut interest rates by 50 basis points on September 18, it’s now China’s turn to reassure investors with a message that strongly resembles a “whatever it takes” to lend credibility to its growth target of around 5% this year, and probably more than 4% next year. The Fed’s rate cut may have accelerated the timing of these announcements, thanks to its positive impact on the Chinese currency (graph 1). The rise in the value of the yuan in recent weeks has created a calmer context for the announcement of a major reflationary plan.

At this stage, no one can say what effect these announcements will have on economic growth, but for the time being, the message takes precedence over the figures. China specialists note a real change in tone from the authorities, marking the end of a period of denial about the risks of contagion from real estate deflation to the rest of the economy. China’s central bank (PBOC) has announced a series of far-reaching monetary and financial stimulus measures, including cuts in bank and mortgage rates, and support for the equity market (graph 2). A strengthening of the banking sector is also planned. As for the Politburo, it committed itself to three key points at an exceptional meeting following the PBOC’s announcements. Firstly, it pledged to make greater use of the fiscal weapon for counter-cyclical actions. Leaks to the Chinese press point to government bond issues of the order of 2,000 billion yuan (or €256 billion) in the coming months. The government has also announced its intention to halt the decline in property prices, rather than continuing to organize an “orderly downturn”. Finally, the Chinese authorities intend to inject income directly into poor and middle-class households, in order to boost consumption.

With Chinese growth contributing around a third of global growth, these announcements are of course significant. They would have been rather unwelcome a year ago, when the rest of the world was struggling with excessive inflation, but today they are stabilizing for the global economy and finance.

For European multinationals, including luxury goods stocks of course, but not only, this is obviously a relief: on average, China accounts for around 20% of the sales of EuroStoxx 50 groups, which explains why European indices are benefiting more from Chinese reflation than American ones. The effect is all the more powerful in the short term, as investors had become very pessimistic about Chinese demand.
To go further in European equities, beyond the EuroStoxx 50, domestic support will also need to be strengthened, as the European economy has shown some worrying signs in recent months. We know that fiscal policy has no chance of providing this support, leaving the ECB as the sole master on board. In this respect, the good news came from September’s inflation figures in France and Spain (graph 3). Inflation fell well below 2% (1.2% in France and 1.5% in Spain), and disinflation extended to the services sector. These figures reinforce the scenario of supporting consumption through gains in purchasing power, and imply that the ECB now has greater room for manoeuvre to combat European recessionary forces. We expect the ECB to accelerate the pace of rate cuts in the months ahead, bringing money market rates to the 2% to 2.5% range as early as the first quarter of 2025, as markets anticipate. Like the US Federal Reserve, the ECB now has its hands free to produce a fully stabilizing policy, all the more so as oil prices remain subdued despite the Chinese recovery. In our global and European flexible portfolios, we are therefore maintaining our overweight in equities.