Raphael Stevens

It is hard to get a man to understand something, wrote Upton Sinclair, an American novelist, when his salary depends on not understanding it. Hard, but not impossible: just look at those paid to promote Britain’s stockmarket. Bankers and stock-exchange bosses have an interest in declaring it an excellent place to list new, exciting businesses, as do politicians. Yet deep down they seem keenly aware that it is doomed.Government ministers once spoke of “Big Bang 2.0”, a mixture of policies aiming to rejuvenate the City of London and, especially, attract initial public offerings (IPOs). But if anyone ever thought an explosive, Thatcherite wave of deregulation was on its way, they do not any more. The new rules are now known as the more squib-like “Edinburgh reforms”. On December 8th the chair of the parliamentary committee overseeing their implementation chastised the responsible minister for a “lack of progress or economic impact”.In any case, says the boss of one bank’s European IPO business, he is unaware of any company choosing an IPO venue based on its listing rules. Instead, clients ask how much money their shares will fetch and how readily local investors will support their business. These are fronts on which the City has long been found wanting. Even those running Britain’s bourse seem to doubt its chances of revival. Its parent company recently ran an advertising campaign insisting that its name is pronounced “L-SEG” rather than “London Stock Exchange Group”; that it operates far beyond London; and that running a stock exchange is “just part” of what it does.London’s future as a global-equity hub seems increasingly certain. It will be drearier. If everyone agrees London is a bad place to list, international firms will go elsewhere. But what about those already listed there? Their persistent low valuation is a big part of what is off-putting for others. And it is much harder to explain than a self-fulfilling consensus that exciting firms do not list in London.The canonical justification for London-listed stocks being cheap is simple. British pension funds have spent decades swapping shares for bonds and British securities for foreign ones, which has left less domestic capital on offer for companies listing in London. Combined with a reputation for fusty investors who prefer established business models to new ones, that led to disruptive tech companies with the potential for rapid growth listing elsewhere. London’s stock exchange was left looking like a museum: stuffed with banks, energy firms, insurers and miners. Their shares deserve to be cheap because their earnings are unlikely to rise much.All of this is true, but it cannot explain the sheer scale of British underperformance. The market’s flagship FTSE 100 index now trades at around ten times the value of its underlying firms’ annual earnings—barely higher than the nadir reached during March 2020, as the shutters came down at the start of the covid-19 pandemic. In the meantime, America’s S&P 500 index has recovered strongly: it is worth more than 21 times its firms’ annual earnings. The implication is that investors expect much faster profit growth from American shares, and they are probably right. Yet virtually every conversation with equity investors these days revolves around how eye-wateringly expensive American stocks are. Should earnings growth disappoint even a little, large losses loom.Britain’s FTSE 100 firms, meanwhile, are already making profits worth 10% of their value each year. Even if their earnings do not grow at all, that is well above the 4% available on ten-year Treasury bonds and more than double the equivalent yield on the S&P 500. At the same time, higher interest rates ought to have made the immediate cashflows available from British stocks more valuable than the promise of profits in the distant future. Why haven’t they?No explanation is particularly compelling. British pension funds might no longer be buying domestic stocks, but international investors are perfectly capable of stepping in. Some sectors represented in the FTSE—tobacco, for instance—may see profits dwindle, but most will not. Britain’s economy has hardly boomed, but it has so far avoided the recession that seemed a sure thing a year ago. Global investors seem content to ignore Britain’s market, despite its unusually high yield and their own angst about low yields elsewhere. Yet spotting such things is what their salaries depend on. There is something Sinclair might have found hard to understand.■Read more from Buttonwood, our columnist on financial markets: Why it might be time to buy banks (Dec 7th)Short-sellers are endangered. That is bad news for markets (Nov 30th)Investors are going loco for CoCos (Nov 23rd)Also: How the Buttonwood column got its name More

China’s current-account surplus was once one of the most controversial statistics in economics. The figure, which peaked at almost 10% of gdp in 2007, measures the gap between China’s earning and its spending, driven largely by its trade surplus and the income it receives from its foreign assets. For much of the past two decades, China’s surpluses have left it open to the charge of mercantilism—of stealing jobs by unfairly boosting its exports. Some trading partners now worry about a similar shock if the country’s output of electric vehicles grows too quickly.But China’s current-account surplus is now modest: $312bn or 1.5% of GDP over the past year, according to the country’s State Administration of Foreign Exchange (SAFE). That is below the 3% threshold that America’s Treasury deems excessive.Is the figure reliable? Some, such as Brad Setser of the Council on Foreign Relations and Matthew Klein, a financial commentator, believe that the official numbers are dramatically understated. China’s true surplus, Mr Klein reckons, is now “about as large as it has ever been, relative to the size of the world economy”. They offer two arguments. First, China may be understating income from its foreign assets. Second, it may be understating exports.According to SAFE, the income China earns on its stock of foreign assets plunged from mid-2021 to mid-2022. This seems odd given rising global interest rates. Mr Setser’s alternative estimate, based on assumptions about China’s assets, would add about $200bn to the surplus.China’s goods surplus also appears smaller in SAFE’s figures than it does in China’s own customs data. The gap was $230bn over the past year. “That is real money, even for China,” says Mr Setser.China might take some comfort from a bigger surplus. But it has an unsettling implication. What is happening to the additional dollars China is earning? Since they are not showing up on the books of China’s central bank or its state-owned banks, they must be offset by a hidden capital outflow. Such outflows typically end up in a residual category of the ledger. Mr Setser believes this residual should be about 2% of GDP, not the official figure of near zero.image: The EconomistSAFE has a different explanation. It attributes the export gap largely to China’s free-trade zones and similar enclaves. These lie inside China’s territory but outside its official tariff border (see diagram). Goods leaving these enclaves for the rest of the world are counted as exports by customs but not by SAFE. Adam Wolfe of Absolute Strategy Research points out that these zones account for a growing share of China’s exports. That may explain why the gap has emerged only in the past two years.Mr Setser is unconvinced. If China’s free-trade zones have enjoyed a dramatic export boom, it should produce ripples elsewhere. Wages earned by workers, for example, should appear as increased remittances. In fact, they have risen only a little. And as Mr Wolfe points out, even if the official current-account surplus is correctly calculated, it may be of little comfort to China’s trading partners. After all, if the country’s domestic demand remains weak, goods made in its free-trade zones may flood foreign markets. The rest of the world will count them, and experience them, as Chinese imports, even if SAFE does not count them as Chinese exports. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

It has been a terrible year to be bullish on China. The CSI 300 index of Chinese stocks has dropped by 13% so far in 2023, to below the level reached during the last of the country’s severe covid-19 lockdowns. Difficulties in the property market are prompting corporate defaults. The lacklustre outlook for economic growth, combined with the need to manage capricious autocratic leadership at home and uncertain relations with big trading partners, makes for a miserable financial climate.This is also a recipe for enormous capital outflows. Foreign investors, who once had boundless enthusiasm for China, are rushing for the exits. So are numerous wealthy Chinese individuals. According to the Institute of International Finance, a think-tank, there have been cross-border outflows from the country’s stocks and bonds for five consecutive quarters, the longest streak on record. Firms are getting itchy feet, too. In the third quarter of this year the net flow of foreign direct investment in China turned negative for the first time since the data began to be collected a quarter of a century ago. In part, this reflects investment by domestic manufacturers in overseas operations, which can lower labour costs and help skirt American tariffs. The size of the overall outflows is up for debate, but some believe up to $500bn-worth is disguised in China’s murky balance-of-payments data.The last surge of capital out of China came in 2015-16. It was set off by a currency devaluation, which was itself sparked by a stockmarket collapse. By one estimate, as much as $1trn escaped the country in 2015 alone. Back then, many countries welcomed Chinese capital with open arms. Now they are suspicious. New destinations for Chinese funds—both legitimate and illicit—are therefore being found.Dodging China’s capital controls is the first task for fretful investors. Some transfers are piecemeal: mainland residents can buy tradable insurance policies in Hong Kong, though they may legally spend only $5,000 at a time. In the first nine months of the year, sales of insurance to mainland visitors hit HK$47bn ($6bn), some 30% more than in the same period in 2019. Other avenues are being closed off. In October China banned domestic brokers from facilitating overseas investment by local residents. For business owners, misinvoicing trade shipments, by overstating the value of goods being transacted, is one way to get money out of the country.Many places are less inviting to Chinese investors than during the last era of capital flight. Dozens of American state legislatures have passed bills blocking foreign citizens residing overseas from buying land and property. Chinese buyers spent $13.6bn on American property in the year to March, less than half the amount spent during the same period in 2016-17. In Canada, another once popular market, non-residents are now banned from buying real estate altogether. Golden visas in Europe, which offer residency rights in exchange for investment, are falling out of favour: schemes in Ireland, the Netherlands and Portugal are being tightened or abolished. Although Hong Kong remains a gateway through which Chinese capital can reach the rest of the world, its appeal as a bolthole for rich families aiming to shield their assets from the Chinese state has dimmed since the territory’s political crackdown.image: The EconomistIt is in this context that Singapore has taken on an increasingly important role. Its success in attracting Chinese cash owes a lot to its relative proximity, low taxes and large Mandarin-speaking population. Direct investment from Hong Kong and the Chinese mainland has risen by 59% since 2021, reaching 19.3bn Singapore dollars ($14.4bn) last year. Suspicious gaps in the trade data between the two countries suggest greater unrecorded capital flight, too, note analysts at Goldman Sachs, a bank.The number of family offices in Singapore rose from 400 in 2020 to 1,100 by the end of 2022, a trend driven by Chinese demand. There is little transparency about what assets ultra-rich investors hold through such vehicles, but Singapore’s modest capital markets suggest that most money will eventually be invested abroad. Nevertheless, Chinese inflows have buoyed Singapore’s banks, helping to lift profits at institutions like DBS and Overseas Chinese Banking Corporation. Other neutral locations are also benefiting from Chinese cash. Although golden visas are in decline elsewhere, issuance in Dubai rose by 52% in the first six months of 2023, compared with the same period in 2022, with lots of recipients thought to be Chinese.image: The EconomistNeutral countries are not the only beneficiaries. Inquiries about Japanese properties from clients in China and Hong Kong have roughly tripled in the past year, says Glass Wu of Japan Hana, an estate agency. The trend has been accelerated by a weak Japanese yen, which has fallen by a fifth in the past three years against the Chinese yuan. Around 70% of the buyers make viewings via video call, says Ms Wu, and buy without first visiting the property. Australia has also seen a surge in overseas demand for property, mostly from potential owner-occupiers, rather than investors as in previous waves, says Peter Li of Plus Agency, a local realtor. Data from Juwai IQI, a property firm, seem to confirm the trend. Since 2020 the median price of homes around the world receiving inquiries from Chinese buyers has risen from $296,000 to $728,000. Rather than buying smaller properties to let, buyers are opting for spacious ones in which they will actually live.Chinese capital can cause problems. It has put pressure on Singapore’s housing market, which is dominated by state provision and contains fewer than half a million private units. In April the state introduced an eye-watering 60% tax on all property purchases by foreigners to try to cool things down. The city’s financial secrecy may also invite the wrong kinds of activity. In August police raids resulted in the seizure of assets including cars, jewellery and luxury property, together worth around $2bn, and the arrests of ten foreigners. The group had all been born in China, but most had acquired other citizenships through international investment schemes. In October the Singaporean government noted that at least one of the accused may have had links to a family office. Other countries in the region, such as Cambodia and Thailand, are wary of hosting elite Chinese citizens who may bring politics with them.Although outflows from China are not yet on the vast scale of those seen during the panic of 2015-16, they might prove more enduring. Back then, a government-engineered credit boom in the property industry helped revive the economy’s animal spirits. This time around, the Chinese government wants to allow the industry to cool. Without a sudden, unexpected recovery in the fortunes of the Chinese economy, the stream of capital looking for an exit is unlikely to slow. Investors and companies will continue to seek a wide variety of foreign assets—the ones, at least, they are still allowed to buy—prompting joy and headaches wherever they land. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

In Joseph O’Neill’s novel “Netherland”, a jaded equities analyst, covering oil and gas firms, confesses to the tricks he uses to add credibility to his stock picks. “Voice a first-hand opinion about the kebabs of Baku”, he says, “and people will buy almost anything you follow up with”.Financial analysts, like journalists, split their time between deskwork and roadwork: meeting executives, inspecting operations, tasting the local cuisine. Are these escapes into the outside world worth it? Travel can be eye-opening. Managers may reveal more in situ than they would on an earnings call. But roadwork is also time-consuming and potentially misleading. Charismatic managers with flashy facilities can employ their own tricks. Stray impressions can skew a visitor’s judgment.In a new paper Azi Ben-Rephael of Rutgers University, Bruce Carlin of Rice University, Zhi Da of the University of Notre Dame and Ryan Israelsen of Michigan State University investigate the benefits of travel. They track 336 analysts of American stocks from 2017 to 2021, estimating the length of their office days from the time they spent logged in to their Bloomberg terminals. Analysts who did not log in during a workday were assumed to be travelling for work.Logging off and getting out has some costs: peripatetic analysts issued fewer forecasts. But their stock recommendations made more of a splash, moving the market by more than their peers’ picks. They were also more likely to be rated as “star” analysts in the rankings published by Institutional Investor, a magazine.Was this prestige deserved? Escaping from the office does, after all, give a stockpicker more time to schmooze with the institutional investors who contribute to rankings. And it fills their sleeves with more seductive tales to tell.On the other hand, the paper shows that the forecasts of well-travelled analysts were also significantly more accurate than those of their peers. Causality is hard to establish: perhaps better forecasters earn more freedom to roam the world. However, the authors demonstrate that when the covid-19 pandemic struck in early 2020, clipping the wings of analysts who had previously travelled frequently, the accuracy of their forecasts deteriorated disproportionately. Travel helps analysts. It’s not just the kebab-tasting. It’s also the tyre-kicking. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Land in any Indian city, such as Bangalore or Hyderabad, and you will be struck by its heady optimism. India’s economy may be in the early stage of a historic boom. Recently released figures show that economic growth roared to an annualised pace of 7.6% in the third quarter of 2023. In the past few weeks four international forecasters have raised their growth projections for the year, from an average of 5.9% to one of 6.5%. The National Stock Exchange of India is now neck-and-neck with Hong Kong’s stock exchange for the title of the world’s seventh-largest bourse.Pause for breath, though, and India’s performance looks a little less impressive. GDP growth has been slightly slower under Narendra Modi, India’s prime minister, who was elected in 2014, than in the decade before. Labour-force participation is a paltry 40-50%, and only 10-24% for women. Subsidies are distorting the economy. A semiconductor plant in Gujarat will create 5,000 jobs directly and 15,000 indirectly. But a state handout covered 70% of its $2.7bn cost. Assuming rather generously that the factory would not have been built without government support, each job cost $100,000—nearly 40 times India’s average income per person.Grappling with the tension between India’s enormous potential and an often messy reality is the task of a new book by Raghuram Rajan, a former governor of the Reserve Bank of India, and Rohit Lamba of Pennsylvania State University. The pair sketch out a vision that amounts to an entirely new model of development for India—one that they argue is better suited to its strengths than its current model. Three lessons stand out from their work.The first is that India should stop fetishising manufacturing—an obsession born of East Asia’s growth miracle. In the 1960s India’s income per person was on a par with that of China and South Korea. By 1990 South Korea had taken off, while India remained level with China. Today China is three times richer and South Korea is seven times richer, adjusted for purchasing power. The growth of India’s rivals was driven by low-skilled manufacturing, which received plenty of state support. Globalisation created a vast market, leading to previously unheard of double-digit growth rates. Once workers and companies got good at the easy stuff, they began to tackle more complex tasks with their newfound skills. Why shouldn’t India follow its rivals’ example?As Messrs Rajan and Lamba explain, the problem is that East Asia has made manufacturing so competitive there is little profit left to be captured. Moreover, automation has reduced the number of available jobs—and manufacturing is no longer where value is to be found. Apple is worth $3trn because it designs, brands and distributes its products. By comparison, Foxconn, which actually makes Apple’s iPhones, is worth a mere $50bn.The second lesson concerns the export of services, which some in India’s government think is a fresh way to tap into global demand. Modern technology, especially the internet, has made services far more tradable. Remote work has accelerated this trend. Meanwhile, governments around the world are desperate to shore up domestic industries. Partly as a result, global trade in goods has declined over the past decade. Yet trade in services has continued to grow. It is hard to argue against seeking a slice of the cushiest part of the global value chain, especially when the line between services and manufacturing is blurring. Some 40% of the value-added in a Chevrolet Volt, for instance, comes from its software.In places, India is finding success. Its famed IT service sector has moved from mostly providing back-office work to more complex front-office fare. According to one estimate, 20% of the global chip-design workforce can already be found in the country. But profound reforms will be required if India is to succeed more broadly. Spending on education as a share of GDP is 3-4%—middling relative to others of similar income. The bigger problem is that India appears to get little bang for its buck. By the latter half of high school, around half of students have dropped out. Bosses report that many of those who graduate are still not ready for work. Getting a new business off the ground is such a nightmare that many startups incorporate in Singapore. Labour laws make workers difficult to sack once they have been employed for more than a year, which incentivises the use of intermittent contracts. France and Italy have global brands, point out Messrs Rajan and Lamba. India does not. It is these sorts of problems that help explain why.The last big item on the authors’ wishlist is liberalism—of both the economic and political varieties. Politicians should start, they write, by jettisoning protectionism. From 1991, when India opened up to global markets, to 2014, when Mr Modi took power, average tariff levels fell from 125% to 13%. They have since risen to 18%, raising the cost of intermediate inputs for producers. India has refused to join regional free-trade agreements, which inhibits the ability of its exporters to reach customers abroad. And Mr Modi’s authoritarian tendencies make it difficult for business leaders to criticise the government when a change of tack is required.Hear the roarMessrs Rajan and Lamba paint a lovely picture of what could be. A better governed, more open India would be wonderful. But whether their ambitions are politically feasible is another question. For example, better public services probably mean devolving power from the central and state governments to localities. And who wants to give up power? Certainly not Mr Modi; probably not his rivals. Moreover, a country can endure quite a lot of illiberalism before growth starts to falter. Until recently, China was humming along just fine. The Asian tigers only became more politically free when they were rich. India’s economy is already growing at north of 6% a year with a policy mix that is far from the perfect.In a strange way, though, this ought to provide Indian reformers with encouragement. Even if only half of what would be ideal is feasible, India’s boom may only just be getting started. ■Read more from Free exchange, our column on economics:At last, a convincing explanation for America’s drug-death crisis (Dec 7th)Why economists are at war over inequality (Nov 30th)How to save China’s economy (Nov 23rd)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter More

The British lender’s asset management division said tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”
HSBC AM believes global markets are heading towards a “new paradigm,” in which interest rates remain at around 3% and bond yields around 4%, driven by three major factors.

The HSBC Holdings Plc headquarters building in Hong Kong, China.
Paul Yeung | Bloomberg | Getty Images

LONDON — Markets have entered a “new paradigm” as the global order fragments, while heightened recession risk means that “bonds are back,” according to HSBC Asset Management.
In its 2024 investment outlook, seen by CNBC, the British lender’s asset management division said that tight monetary and credit conditions have created a “problem of interest” for global economies, increasing the risk of an adverse growth shock next year that markets “may not be fully prepared for.”

HSBC Asset Management expects U.S. inflation to fall to the Federal Reserve’s 2% target in late 2024 or in early 2025, with the headline consumer price index figures of other major economies also set to drop to central banks’ targets over the course of next year.
The bank’s analysts expect the Fed to begin cutting rates in the second quarter of 2024 and to trim by more than the 100 basis points priced in by markets over the remainder of the year. They also anticipate that the European Central Bank will follow the Fed, and that the Bank of England will kickstart a cutting cycle but will lag behind its peers.
“Nevertheless, headwinds are beginning to build. We believe further disinflation is likely to come at the price of rising unemployment, while depleting consumer savings, tighter credit conditions, and weak labour market conditions could point to a possible recession in 2024,” Global Chief Strategist Joseph Little said in the report.
A new paradigm
The rapid tightening of monetary policy by central banks over the last two years, Little suggested, is leading global markets towards a “new paradigm” in which interest rates remain at around 3% and bond yields stick around 4%, driven by three major factors.
Firstly, a “multi-polar world” and an “increasingly fragmented global order” are leading to the “end of hyper-globalisation,” Little said. Secondly, fiscal policy will continue to be more active, fueled by shifting political priorities in the “age of populism,” environmental concerns and high levels of inequality. Thirdly, economic policy is increasingly geared towards climate change and the transition to net-zero carbon emissions.

“Against this backdrop, we anticipate greater supply side volatility, structurally higher inflation, and higher-for-longer interest rates,” Little said.
“Meanwhile, economic downturns are likely to become more frequent as higher inflation restricts the ability of central banks to stimulate economies.”
Over the next 12 to 18 months, HSBC AM expects investors to place greater scrutiny on corporate profits and the ongoing debate over the “neutral” rate of interest, along with a heightened focus on labor market and productivity trends.
‘Bonds are back’
Markets are now largely pricing a “soft landing” scenario, in which major central banks return inflation to target without tipping their respective economies into recession.
HSBC AM believes the increased risk of recession is being overlooked and is positioning for defensive growth alongside a prevailing view that “bonds are back.”
“A weaker global economy and slowing inflation are likely to present a supportive environment for government bonds and challenging conditions for equities,” Little said.
“Therefore, we see selective opportunities in parts of global fixed income, including the U.S. Treasury curve, parts of core European bond markets, investment grade credits, and securitised credits.”
HSBC AM is cautious on U.S. stocks, due to high earnings growth expectations for 2024 and a stretched market multiple — the level at which shares trade versus their expected average earnings — relative to government bond markets. The report analysis sees European stocks as relatively cheap on a global basis, which limits downside unless a recession materializes.
“Japanese stocks may be an outperformer among developed markets, in our view, due to attractive valuations, the end of unconventional monetary policy, and a high-pressure economy in Japan,” Little said.

He added that idiosyncratic trends in emerging markets also warrant a selective approach rooted in corporate fundamentals, earnings visibility and risk-adjusted rewards. If the Fed cuts rates significantly in the second half of 2024 as the market expects, Indian and Mexican bonds and Chinese A-share stocks — domestic shares that are dominated in yuan and traded on the Shanghai and Shenzhen exchanges — would be some of HSBC AM’s top emerging market picks.
India’s post-pandemic rebound and rapidly growing markets and Japan’s continued exit from unconventional monetary policy render them as attractive sources of diversification, Little suggested, while Chinese growth is widely projected at around 5% this year and 4.5% in 2024, but could also benefit from further fiscal policy support.
“Asian equities are in a stronger position in terms of growth and are likely to remain a relative bright spot in the global context,” Little said.
“Regional valuations are generally attractive, foreign investor positioning remains light, while stabilising earnings should be the key driver of returns next year.”
Asian credit should also enjoy a much better year as global rates peak, most regional economies perform well and Beijing offers an additional fiscal boost, he added. More