Market report: China’s worries weigh despite stimulus, but Holiday Inn owner sees revenues soar
- Key mortgage rate cut more steeply than expected in China, highlighting authorities’ concerns about economic fragility.
- FTSE 100 opens lower amid concerns about slower growth due to high interest rates and China challenges.
- Brent Crude trades around $83 a barrel, hovering near multi-week highs as Middle East conflict continues.
- Holiday Inn owner, IHG, announces $800 million share buy-back amid soaring revenues per available room.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The fragility of China’s economy is weighing on minds as the country remains mired in a real estate slump with the latest attempt to stimulate demand highlighting the depths of the problems. The People’s Bank of China cut a key lending rate, the 5-year loan prime rate by 25 basis points, to 3.95%, more than the 15 basis points expected, and the first reduction since last summer.
The sharper than expected cut hasn’t done the trick of shoring up confidence yet. It’s concentrated minds on the collision of concerns about the economy, from real estate debts to deflation to falling foreign investment. Iron ore prices are trading around three-month lows, as hopes that demand for steel could rebound have ebbed away. Asian stocks dipped back again as worries continued about the economy, setting the scene for a lacklustre start to trading for the FTSE 100, with investors also mindful that high interest rates may be sticking around for longer in the United States.
China’s property woes extend deep into the economy. Construction fired up growth in China over the last few decades as urbanisation accelerated, fuelled by debt, and efforts to rein that in and tighten regulation have caused a big wobble. This matters because the property sector accounts for some 30% of GDP. Already chunks of the property house of cards have begun to collapse, such as the giant Evergrande, now in liquidation in Hong Kong. Although given the high savings rates in China, mortgage defaults are less of a concern, falling prices affect household wealth perceptions and consumption across the economy. Although overall spending during the longer Lunar New Year holidays beat 2019 levels, the amount spent per trip was down around 9%, a symptom of the consumer cautiousness hitting the huge country.
Expectations of lower energy demand, partly due to China’s challenges and forecasts that interest rates may have to stay higher for longer in the United States, are keeping a floor on oil prices, but they are still edging multi-week highs. With hopes of a ceasefire in Gaza still so elusive, concerns are still high about the spread of conflict in the Middle East. Houthi rebels have continued attacks on ships in the Red Sea, using drones and missiles. They are adding to concerns about oil supplies from the region, with tankers among the vessels targeted. The ongoing threat and seeming intractability of the tragic Gaza-Israel conflict makes it more likely the re-routing of shipping will have to bed down for the longer-term, adding to company costs, and potentially making inflation that bit more stubborn.
Rising geo-political conflict hasn’t trampled down on the urge to travel around the world, with Holiday Inn owner, IHG, still benefitting from post-pandemic pent-up demand. This strong performance played out across all markets, helping push full year operating profits above $1 billion for the first time. Crucially, a key metric, revenue per available room, (RevPAR) was up 16% with travellers willing to pay more for trips having been starved of experiences during periods of extensive Covid restrictions. The increase was most stark in Greater China, where revenues per available room soared by around 72% compared to the year before, while in the Middle East it hit 23%. While it’s clear that consumers have been tightening their belts when it comes to buying goods, which they might covet but not need, they are ringfencing budgets for holidays and experiences. However, there is a risk that if high borrowing costs linger in key markets, and Chinese consumers show more caution, there may be less appetite going forward for expensive holidays, especially if post-Covid demand wanes.’’
