Drumbeat of China bulls is banging much louder

Our round-up of the week’s best comment and analysis from the Financial Times focuses on positive signals for the word’s second-largest economy and the implications for investors of the Federal Reserve rate rise.

The selection is taken from our Markets Insight and Smart Money columns, written by industry contributors and FT commentators.

Investors may be wary of being burnt by China but the drumbeat of bullish noises are banging ever louder from bank strategists, argues the FT’s Jennifer Hughes.

Morgan Stanley, Goldman Sachs and Citgroup are among the names countering their sceptical clients in putting the case for improving prospects for the country, particularly on calming fears over levels of leverage.

“China bears can still find plenty to cavil at and can, of course, always argue the risk of a nasty policy surprise from Donald Trump outweighs a profit pick-up. But bullish analysts are showing increasing confidence and they can call on numbers, too.

“Funds invested in the S&P 500 or the FTSE Eurofirst a year ago would have returned 20 per cent and 14 per cent, respectively. The same money in the Hang Seng China Enterprises index would have produced a 28 per cent total return.”

But Aberdeen Asset Management’s David Smith sees a less positive signal emerging from Singapore, where the exchange is considering the listing of companies with multiple classes of shares carrying different voting rights — allowing a small group to keep a tight grip on control at the expense of wider shareholder rights.

“There is a real sense that were Singapore Exchange to make such a move, the global contagion would be swift. Instead of discussing dual-class shares, we should be designing a corporate governance framework to help investors operate as responsible stewards.”

Moving even further westwards in Asia, the FT’s Henny Sender finds more troubling developments in India’s power sector, where lending by banks has left the country’s financial system exposed.

“Investors should look more closely at the economy and particularly at the power sector because it is symbolic of the difficulties India faces. The deeply troubled power industry accounts for almost one-tenth of all bank loans in India and thus poses a threat to already weakened lenders.”

The Federal Reserve’s rate increase was the big theme of the week both before and after confirmation of the news. Allianz’s Mohamed El-Erian forecast that a “beautiful rate normalisation” would be the overarching aim of the US central bank.

“The Fed would be transitioning from a highly tactical (“data dependent”) mindset towards a more strategic one; and it is one that enables it to more confidently (and assertively) lead markets rather than follow them.”

The FT’s Michael Mackenzie warns of the risks of a complacent bond market as fixed-income investors are not convinced that the Fed will be more aggressive.

“Having been consistently right over the economy and Fed policy for many years, one can understand the reluctance of the Treasury market to embrace a more bullish growth story. Such thinking may prove very costly for bond investors.”

“The Fed is walking the line successfully”, summarised the FT’s John Authers as the rate move went from news to fact.

“All of this may make this one of the most happily received rate increases on record. Insofar as the Fed’s aim was to raise rates as gently as possible, so as not to scare the children, it has succeeded. for now, the calm that has lasted since the election remains unpunctured.”

It has been tricky to tell how Brexit is being priced in by markets, argues the FT’s Elaine Moore, with gilts not providing a clear narrative.

“By contrast, credit default swap spreads appear to have a more direct relationship to what a small number of investors believe the eventual shape of Brexit will mean for the UK economy. As a barometer of investors’ attitude during the two years of negotiations that will soon start, this small, unfashionable corner of the financial market may well start to attract more people and money.”

While last year’s “regime change” in the US stock market has boosted the opportunities for stockpicking, John Authers finds that active fund managers still face a long, hard fightback against passive investing.

The rise of algo trading and passive investing is bringing new patterns and pitfalls for investors, says the FT’s Robin Wigglesworth, who reveals five areas to watch on the terrain of machines and markets.

Marmite manufacturer Unilever is not a national champion and shareholders should be free to sell its stock, says the FT’s Neil Collins, who argues that they have much to thank “Warren Buffett and his Krafty krew” for the jump in the share price.