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China: Consumers 'shell shocked' over economic slowdown, strategist says

China's GDP outlook has tumbled on Wall Street's new forecasts projecting the country's economy to overtake the United States' in the 2040s. ClearBridge Investments Head of Economic and Market Strategy Jeff Schulze discusses China's slower-than-expected recovery coming out of its zero COVID policies.

"If you look at the data today with the services disappointing that China does need to view more stimulus and they need to support the property markets," Schulze says. "The one thing they need to do is restore confidence in both consumers and businesses."

Schulze also talks about how investors should be viewing Chinese assets and other opportunities offered in foreign markets such as India.

Video Transcript

BRAD SMITH: As China faces more economic roadblocks, a new forecast from Bloomberg Economics shows that the country's timeline to overtake the US as the world's largest economy is looking weaker. China's GDP isn't set to surpass the US until the mid 2040s, but Bloomberg economists warn that even then it would be by only a small margin.

Jeff Schulze who is the ClearBridge Investments Head of Economic and Market Strategy is back here with us. So what is the, perhaps, broader implication if a China outlook, at least, looks further out for how quickly that economy is set to grow and where other economies around the world might feel that, as well?

JEFF SCHULZE: Well, it's clear if you look at the data today with the services disappointing that China does need to view more stimulus, right? And they need to support the property markets. The one thing that they need to do is restore confidence in both consumers and businesses. And consumers are a little shell-shocked because China had signaled that they're going to loosen the three red lines on property developers in late 2021. And then, they shut down the economy in 2022. And obviously, you saw the biggest drop in the property markets there since the mid 1990s.

So consumers are shell-shocked after zero-COVID-tolerance policies. They're going to need a much bigger stimulus package in order to pull the economy out of the doldrums. And I think that is going to be forthcoming, even though it may be a couple of months till they come to that realization. But when that happens, you're obviously going to have a knock-on effect for not only China, but it's always going to be good for emerging markets. It's going to be good for Japan. And you're going to see some benefits accrued to Europe and energy and materials companies here in the US.

BRAD SMITH: What makes you so confident? We've talked to a lot of people about China. A lot of them have said, that stimulus is not coming. You know, you'll get more of the same, sort of, trickle of stimulus that we've been getting, but we're not going to see the same size that they have done in the past. And it's interesting because even as we get estimates that the Chinese economy is not going to overtake the US-- at least not on the same timetable that estimates once put it-- but China hasn't come out and done the big stimulus. What would convince them to change their minds?

JEFF SCHULZE: Well, I think from their vantage point, they think that this time is not different as compared to previous easing cycles where just the signaling effect created a lot more demand. For the first time, given what we talked about earlier with the consumer, you don't have that excess demand that the property market is going to continue to move higher, and that policymakers will support it.

So they're eventually going to come to that conclusion, just like they came to that conclusion with zero-COVID-tolerance policies at the end of last year when they rip the Band-Aid off and opened up the economy very quickly. But I think they're going back to that old playbook. And when that proves to be ineffective, I think they're going to change their tune because they're going to have to.

So unfortunately, it's going to take a little bit of time. And again, we may see some lackluster growth in the Chinese economy for the next three to four months until that reality comes home to roost.

BRAD SMITH: Amid that lackluster growth, then, are there investment opportunities that are top of mind that investors could be thinking about within China at this point?

JEFF SCHULZE: Well, I think at the moment, you want to sit on the sidelines until authorities act with a little bit more aggressiveness. I think it's going to take some time, again, for that conclusion to come through. But when they do, I think consumer-oriented equities are going to do well in that environment. If there's going to be a greater loosening in the property sector, again, I think energy and materials companies look really attractive at these levels. So those are the areas that I would be looking to play as we move deeper into the fourth quarter and a little bit more of a shotgun approach to stimulus comes through.

JULIE HYMAN: Would it be the same for American companies that rely on China, or if not rely, then are looking to China for growth, to juice their growth? Do you think people should, kind of, wait for that stimulus to come, and then maybe get in on some of those, as well?

JEFF SCHULZE: I do. I do. Just because things are cheap, doesn't mean they can't get cheaper. So I think as investors continue to be disappointed, those companies that are highly tied to Chinese economic activity are going to lag. But again, you don't want to wait on the sidelines too long because China can move very aggressively in a short period of time, given just the top-down leadership that you have in that country. So again, they haven't come to that full realization that the old playbook is dead, but I think they eventually will.

BRAD SMITH: So if not China, then right now for some investors is it the other major economy that was set to be-- it was one and two, China and India for the most growth that we were set to see this year. Does that naturally pivot attention to India, then?

JEFF SCHULZE: Yeah. I think Indian equities could look like an attractive opportunity, if you didn't want to wait on the sidelines for three or four months at the moment. But again, I do think that there are going to be opportunities that do present themselves. Investors just need to be a little bit patient after the strong rally coming into 2023 for Chinese equities. You've basically given that back. But they're very cheap on a relative basis.

And I think when you do get that full-throttle stimulus, emerging markets, more broadly speaking, are going to be attractive, given the fact that most of those emerging markets and their central banks have already dealt with inflation. They're in the position where they can actually start to cut rates and provide some stimulus to their economies.

JULIE HYMAN: All right, Jeff, good to see you. Thanks for coming into the studio. Jeff Schulze is ClearBridge Investments Head of Economic and Market Strategy. Thank you.

JEFF SCHULZE: Thank you.