1. Chinese equities, as represented by the MSCI China index, rebounded from May 2022 lows on optimism the economy should rebound as Covid-19 restrictions are eased. China’s closed-loop system for factories has helped to partially mitigate the negative consequences of restrictions on movement. This has had a positive effect on high value-added industries, including semiconductor and vehicle manufacturing, which have been able to operate throughout the recent Covid-19 outbreaks.

 Leading indicators, including the Caixin China General Services PMI (purchasing managers’ index), rebounded in May, and are expected to continue to recover in the coming months. Consensus expectations are for further interest-rate cuts, which in combination with potential further weakness in the renminbi could ease financial conditions and support a recovery in gross domestic product growth toward the government’s target of 5.5%.

2. The shape of a yield curve is often viewed as an economic growth proxy. A steep yield curve indicates optimism over the growth outlook and a flat or inverted curve indicates pessimism. The US yield curve has recently flattened; if it were to tip into negative territory, it could be a negative signal for the economy and global markets. Factors we are monitoring that could influence the future shape of the US yield curve include US interest rates, oil price trends and financial conditions.

3. The upcoming earnings season is expected to show weak earnings growth in the first half of 2022 in emerging markets. However, we believe markets have already discounted this outcome and the primary focus is expected to be on guidance for the second half of 2022 and 2023. Consensus expectations are for 9% growth in emerging market earnings in 2023, in line with where forecasts were at the start of the year. Rising borrowing costs and increasing inflation are a risk to earnings, but healthy consumer balance sheets and a robust labour market signal demand and, in turn, future earnings growth may prove to be resilient.

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