Morning Note: Market news and our thoughts on Chinese equities.

Market News

US producer inflation figures for August came in well below expectations – core was 2.8%, versus 3.5% forecast – suggesting tariff-related price pressures have yet to fully materialise, giving the Fed further scope to cut interest rates at a time when the labour market is showing signs of a significant slowdown. The next data point is Core CPI, which it expected to have risen by 0.3% MoM in August, the fastest since January, driven by services. Gold drifted lower to $3,630 an ounce, albeit still close to an all-time high.

Mexico plans to impose up to 50% tariffs on cars and other products made in China, aligning with US policies ahead of North American free-trade talks. However, China and the US engaged in high-level talks between top diplomats and defense chiefs, paving the way for a potential Xi-Trump meeting.

The ECB is set to leave rates on hold today, with analysts seeing no more cuts this cycle. Economists expect fresh quarterly projections to temper fears about inflation being lodged below 2%.

US equities moved slightly higher last night – S&P 500 (+0.30%); Nasdaq (+0.03%) – driven by energy and software stocks. In Asia this morning, equities were also firm: Nikkei 225 (+1.2%); Hang Seng (+0.1%); Shanghai Composite (+1.6%). China’s cross-border investment flows reached $4.5 trillion in the first seven months of 2025, surpassing trade flows for the first time. The tipping point moves China a small step closer to developed counterparts like the US and Japan, where investment flows outnumber trade by at least 10-to-1.

The FTSE 100 is currently 0.4% higher at 9,257, while Sterling trades at $1.3510 and €1.1555. Brent Crude trades at $67.50 a barrel on news that OPEC+ may only add 70k b/d of supply in October at a time of ongoing heightened geopolitics.

Source: Bloomberg

Market View – Chinese Equities

The Chinese equity market has been a bit of a graveyard for investors for a long time.  There have been several attempts in the last decade to engage animal spirits, but each burst of enthusiasm eventually fizzled out and the net result is that Chinese equities have done nothing for 15 years.

MSCI China

Source: Bloomberg

This is not to say the size of the Chinese stock market has not increased.  The chart below shows the market capitalisation of the same index over the same period which has increased tenfold.  This is because Chinese companies have issued a lot of equity over this period.  This is a stark contrast to the S&P 500 were US companies have reduced their share count with buybacks.

MSCI China – Market Capitalisation

Source: Bloomberg

In early 2024, the Chinese authorities began several measures to support their domestic equity markets.  Central Huijin, the state’s influential investor arm, stepped into the equity market as part of a broader market-support effort.  It significantly ramped up its holdings in exchange-traded funds (ETFs), with assets exceeding RMB1 trillion (approximately $140 billion), making it a cornerstone of the government’s stabilisation efforts.  This marked a sevenfold increase in its ETF holdings from the prior year.  In addition, there were regulatory changes and mandates for institutional investment in domestic shares.  The chart below shows that Chinese equities have handily beaten the S&P 500 since these measures were announced.

MSCI China V S&P 500 (USD)

Source: Bloomberg

There are undoubtedly some negative fundamentals such as the massive overcapacity, depressed housing market, and substantial demographic headwinds.  However, China has made huge strides in some of the most cutting-edge technologies such as electric vehicles and artificial intelligence. It also has the lowest cost of energy and capital in the world.  By contrast to the US markets which trade at all-time high valuations, Chinese equities trade on much more modest valuations with room to expand.  In the wake, of Russia’s invasion of Ukraine, Chinese assets were viewed as un-investable.  However, as time passes and “realpolitik” reasserts itself, the tide has changed but still has a long way to go in terms of investor positioning.

Outlook

The history of the Chinese stock market in the last decade has broadly been one of woe, punctuated by some bouts of frenzied speculation.  This time around we feel that the authorities are trying to engineer rising asset prices but in a more measured way.  As such, a period of consolidation is likely as Chinese regulators propose measures to cool speculation and curb the rapid growth in margin financing.  Looking further out, the case for owning Chinse equities remains strong, supported by a favourable policy backdrop.  We feel that the authorities would much rather see a slow and steady bull market driven by long-term value investment, not retail speculation.  In the past, domestic savers have shunned their home markets as the authorities have prioritised other policy areas.  As the rest of the world becomes a more hostile place for surplus Chinese capital, domestic equities should benefit.