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An Evolving Pandemic – Opportunities and Risks

As major parts of the US economy reopened, a re-acceleration of COVID-19 cases began with some states recording daily highs. New daily cases in Florida broke the daily record for all US states with more than 15,000 new cases on 12 July while new cases in Texas topped 10,000 for the first time on 7 July as the total number of cases in the US reached 3.27 million on 12 July. However, Citi analysts think it is unlikely to see a repeat of indiscriminate shutdowns across the world economy as a response to the threat.

 

Sufficient strength in US economic rebound

With 10.6 million jobs still on furlough, there is further potential for net job gains, with the unemployment rate improving to 11.1% in June from 14.7% two months ago. Purchasing managers data bounced back substantially in June – ISM manufacturing rose to 52.6 from 43.1 in May –  this is consistent with the jump in manufacturing employment of 356,000 in June after the shuttering of factories in March and April, with some industries forced down to record low output levels.

 

While the public fear over the spread of COVID-19 may inhibit growth rates, the economic rebound looks to have sufficient strength to continue through a spike in the virus.

 

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Tensions in China/HK relationship – What are the implications?

Despite heightened uncertainties from the implication of China’s National Security Law on Hong Kong, both stock markets have rallied with the Shanghai Composite and Hang Seng Indices gaining 13.3% and 5.3% month-to-date as of 10 July.

 

The notable rebound in A-shares is in line with Citi Private Banks’ call in favor of cyclical equities and reflecting growing confidence in China’s recovery. However, China’s policy makers are taking measures to curb investor enthusiasm amid the strong A-share bull-run. The securities regulator warned illegal off-book margin financing, two state-owned funds trimmed their holdings, and the banking regulator also tightened rules. The overall policy tone is still supportive, as visible in credit growth, but Citi analysts think short-term market sentiment could be curbed by policymakers who may prefer a slower bull market with wider participation.

 

In the longer term, Citi analysts are overweight on Emerging Asia equities, remaining optimistic on Asian consumption, technology and healthcare themes.

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