Increased Chinese regulatory scrutiny, oil demand-and-supply dynamics, and US house inflation all affect markets and therefore your investment decisions.
After allowing Chinese technology companies relatively free rein to operate, innovate and build industry-leading platforms for the last two decades, Chinese regulators have increased its scrutiny in a meaningful way. Initially in 2020 the Ant Group's initial public offering (IPO) was pulled at the last minute, but we have now seen further tightening in sectors such as e-commerce, payments, food delivery, ride hailing and more recently education and music streaming platforms. While the increased scrutiny is partially regulators playing catch up, the reach of the Chinese communist government, and the lack of recourse for these companies against a judgement, have shaken the investment community and resulted in a fierce market sell-off.
In the United States (US), scrutiny over US-listed Chinese companies have continued with bipartisan support, with the recent Didi IPO scandal further infuriating US lawmakers. While the operational impact on the Chinese BAT (Baidu, Alibaba, Tencent) companies remains somewhat limited, the market appears to be pricing in further restrictive regulation to emerge in future. The question remains, however, whether regulators will stint the growth of these companies and reduce the positive economic and technological contributions they make to the Chinese economy, or whether regulators are only playing catch up and trying to create a more equal competitive landscape.
The heavy hand of the Chinese regulator in the after-school tutoring market in China also sparked renewed fears regarding the use of variable-interest entities (VIEs), which resulted in a steep decline in Naspers/Prosus during the month.
The focal point in the oil market was the Opec+ meeting outcome at the start of the month. The meeting ended at an impasse, with the United Arab Emirates said to be requesting a higher production baseline. Oil prices became volatile as the impasse stoked fears of a market share war, such as that in April 2020, while the lack of an agreement continued to tighten markets as inventories draw down. A compromise was agreed to two weeks later, where Opec+ members would gradually increase production for the remainder of the year.
Further Covid-19 waves remain a downside risk for oil demand and the Opec+ agreement aims to limit the fallout in such a scenario by keeping the market in a mild deficit. US shale producers are cautiously adding oil rigs, looking to benefit from higher prices, while staying watchful of the Opec+ spare capacity threat.
In the US, we have seen many affluent consumers managing to increase their savings recently, stemming from the combination of stimulus cheques received and limited avenues for spending given lockdown restrictions, in addition to the sharp recovery in financial markets. This accumulation of savings combined with ultrasupportive monetary policy, where homebuyers can lock in 2-3% fixed-rate 30-year mortgages, has resulted in an insatiable demand for housing.
The latest median sales price of an existing home was up 27,3% in June versus a year earlier in the US, a remarkably high number. In the United Kingdom, house prices were up 13,4% in June versus a year earlier. This was the largest increase since November 2004. So far in the US, supply has yet to catch up with demand, which saw lumber prices reach a record high of $1 670 per thousand board feet more recently. The work-from-home movement has also caused a shift of demand from inner-city homes to surrounding suburbs. A softer housing market will be a key performance indicator going forward to assess the trajectory of the economic recovery in the US.
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