Ray Farris
Chief Economist
Eastspring Investments
Summary
Despite tariff uncertainty, better than expected earnings have kept asset market returns positive and market volatility moderate somewhat. China gets good news on property and AI while India begins monetary reflation.
What’s top of investors’ minds
Earnings work to offset uncertainty over tariffs and inflation.
Higher than expected US inflation in January has added to the uncertainty created by the Trump Administration's vacillations over tariffs. However, better than expected earnings have allowed asset market returns to remain positive and equity and bond volatility to moderate somewhat. With 383 constituents of the S&P 500 having reported at the time of writing, earnings are beating estimates by 6.5% with consumer discretionary and finance beating by 15.6% and 10.6% respectively. The recent fall in US initial jobless claims suggests that US employment and income growth will remain healthy in February, supporting real consumption growth of 3% - 4% in Q1 and so earnings growth. Similarly, faster than expected wage growth in Japan in December and expectations for a strong Shunto are helping Japanese earnings estimates to grind higher. In China, enthusiasm for new AI models has spurred a bounce up in earnings estimates
We think these trends should remain intact for the next couple of months. President Trump appears to be willing to delay most tariffs while he negotiates various issues with Mexico, Canada, and perhaps China. However, the clear risk is that if these break down he could choose to implement tariffs quickly. We estimate that tariffs on the scale that Trump has announced will slow both US and global growth, push up inflation, and cause further delays in Fed interest rate cuts.
Good earnings have helped equity returns and volatility
China gets good news on property and AI
Markets are currently giving China the benefit of the doubt on two fronts. First and most important for equities, the announcement of Deepseek and the subsequent announcement that Apple will use Alibaba AI for its phones in China have spurred upgrades to earnings estimates for China's tech sector. This should be a durable, although sector and company specific trend.
Another key positive has been a larger than expected government intervention into a large property developer in an effort to prevent it defaulting on maturing debt. If this proves successful it could become a blueprint for further, new government intervention into the property market. To be sure, this possibility remains highly uncertain at this stage.
Away from these, early indications for consumption growth during the Chinese New Year holiday season look mixed and overall slightly soft. We continue to think that deflationary pressure from China's property market will continue to weigh on the economy in absence of new fiscal stimulus. The government has signaled it will expand the public fiscal deficit this year meaningfully – we estimate by about 1.5% of GDP – but is choosing to wait to announce this at the "Two Sessions" in March and implement this stimulus in the following months. We judge this to imply indicators of domestic growth will slow somewhat in Q1 from the pick-up in Q4 even if export growth remains robust as companies try to front run US tariffs.
AI hopes boost Chinese equities
Monetary reflation has begun in India
The Reserve Bank of India cut its policy rate 25bps at its February meeting, as expected, and is continuing to inject liquidity into the financial system. We judge the RBI Governor Malhotra as biased to support growth with further easing and expect another 50bps of rate cuts this year with 75bps possible. Prime Minister Modi's rapid engagement of US President Trump also increases the likelihood that India will avoid significant US tariffs. Monetary easing needs to extend further with another cut in the next several months before it will impart a meaningful boost to growth. Our expectation is that Indian GDP will remain soft in Q1, begin to stabilise in Q2 and then begin to recover in Q3. We expect fixed income returns to benefit from easing ahead of equity returns, but remain constructive on the outlook for Indian equities over the course of the year.
More rate cuts needed to boost growth
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