Q3 2024 Update from the Asia Trade Floor

Hello and welcome to our latest Asia Trade Floor update. Today, I will be focusing on recent developments in India and China, and the implications for portfolios.

Text on screen: Stephen Chang, Portfolio Manager, Asia

Let’s begin with India, where Narendra Modi has secured a third term as India’s prime minister and recently delivered his 2024 budget.

Text on screen: What are the key takeaways of Modi’s 2024 Budget?

Despite the high economic growth delivered, the campaign by the opposition on unemployment and income inequality had almost cost Modi the election. For the 2024 Budget, the government will particularly focus on jobs, skilling and the middle class. India’s finance minister described India’s economy as the “shining exception” in a world facing economic challenges.

A few key Budget takeaways we would highlight:

First, the budget aims to narrow the fiscal deficit to 4.9% of GDP, down from 5.1% announced in the interim budget.

Second, a significant allocation of 2 trillion rupees (or 24 billion US dollars) is dedicated to creating better job opportunities and higher employment, education, and skill development.

Third, income tax cuts, to stimulate investment and consumption.

Fourth, the announcement of capital gains tax increase caused market jitters, but we do not expect it to significantly impact market sentiment in the long run.

Lastly, corporate tax rate cuts for foreign companies and abolition of angel tax could attract more international investments, encourage more investments in the startup ecosystem, foster innovation, and enhance the business environment in India.

With Indian bonds now included in the JP Morgan Emerging Markets Bond Index and continuity in Modi’s government, we forecast strong GDP growth of around 7% year-on-year in FY2024. Inflation is relatively low and stable, moving toward the Reserve Bank of India’s 4% target, with measures to contain volatile food prices.

We expect India’s macro stability to continue, driven by decent earnings growth that support equity market performance and a nearly balanced current account. Foreign direct investment is picking up. We remain positive on the Indian Rupee and expect it to continue to outperform other Asian currencies.

Text on screen: What about our outlook for China?

China’s economy continues to operate at two speeds: manufacturing activity and exports have surged, while consumption and the property market have stalled.

In June, exports grew for the third straight month, up by nearly 9% compared to the previous year. Manufacturing investment also rose by over 9%. On the other hand, retail sales increased only 2%, the lowest level since the Covid pandemic. Meanwhile, property investment and sales continue to decline.

At the Third Plenum, a key policy meeting for China’s Central Committee held in mid-July, president Xi and his leadership reiterated the focus on deepening reform, advancing the country’s modernisation, and enhancing domestic technology.

Over 300 important reform measures have reportedly been adopted, including support for private enterprises, a “higher-standard” opening up of the economy, and strengthening talent cultivation and scientific and technological innovation.

A few days after the meeting, China surprised markets by making its first rate cut since February. A key short-term policy rate and benchmark lending rates were each trimmed by 10 basis points – or 0.1 per cent.

To help spur domestic demand, China has also stepped-up support for consumer goods trade-ins and equipment upgrades to the energy, electricity, and battery sectors. This includes ultra-long special treasury bond issuance, as well as financial aid for the scrapping and renewal of used vehicles and home appliances, and recycling of waste electronic products.

As we await further details of policy reforms, we remain cautious on China, mindful of potential headwinds, including persisting weakness in domestic demand and geopolitical tensions. Our base case remains unchanged: we expect China will deliver close to its 5% growth target for 2024. However, we think policies will need to be implemented soon, given the disappointing Q2 GDP print of 4.7% year-on-year.

Text on screen: What do these latest developments mean for China’s role in the global economy?

China is keen on globalization in many aspects, but we see a populist shift in other major markets, most notably the U.S. – as evident from its ongoing election campaigns.

China’s new growth model, focused on production and infrastructure to counterbalance a property sector collapse, is driving a rise in manufacturing exports. In Q2 this year, China’s manufacturing sector grew 6.2% versus last year, faster than the overall economy for a third quarter in a row. Production of electric vehicles, solar panels and many other products hit double-digit year-on-year growth in June, even as domestic sales of vehicles, appliances and electronics have all fallen versus last year.

This pivot requires re-evaluating China’s role in the global economy, especially its impact on commodity markets and inflation, as well as its integration into the global financial order.

But this applies not only to China. In PIMCO’s latest economic and investment outlook for the next three to five years, we discuss the shift toward a multi-polar world order, led by the U.S. and China, where cooperation seems limited and new middle powers may emerge.

We think this shift will likely lead to less synchronized business cycles and lower correlations across financial markets. The differentiation in central bank policies and market conditions across regions will present unique opportunities for active investors to capitalize on these discrepancies.