Bull in the China shop - the week ahead

In the absence of much market-moving news, investors are continuing to view the glass as half full. Stock markets around the world are hovering near record highs, even if the momentum of the summer rally is starting to fade.

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Short and long-term bull market

Whichever end of the telescope you look through, the bull market is in fine fettle. Since the April lows, stock markets have gained anywhere from the high teens in percentage gains in the UK and Europe to 35% in Japan.

Over one year, the main markets are between 10 and 20% higher, while since the October 2022 low the gains are even more impressive - 80% in America, closely followed by Europe and Japan. The FTSE 100 is up around 40% in three years and China is 20% better.

Standing back and looking at the 16-year bull market since the March 2009 low point after the financial crisis, the gains have been life-changing. The US stock market recently registered a 10-fold gain over that period.

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Where next?

The short answer is no-one knows how long this can go on. As ever, earnings and valuations are the main drivers. Earnings look good. A 7% forecast rise in year-on-year profits looks conservative. It is usually upgraded as earnings emerge so when results season gets underway in a few weeks, expect this to push up to double digits.

More of a concern is valuations. In the US, shares trade at about 25 times earnings, which has only really been bettered in the final stages of the dot.com bubble a generation ago. There are valid concerns that the ongoing AI growth story offers worrying echoes of the internet boom in the 1990s.

Elsewhere, valuations are much less stretched, even in markets like China and Japan which have performed so strongly this year.

Bull in the China shop

One market that is enjoying a notable shift in momentum is China, even if the rally in the year to date feels a bit more liquidity than fundamentals driven. But the economy is not getting any worse, government policy is supportive, valuations reasonably cheap and domestic investors have turned decisively positive.

In part, that is because, with capital controls in place, Chinese investors have a limited set of options for their sizeable household savings. Property remains in a long slump and is unattractive. Cash likewise, with interest rates low. Gold has already enjoyed a strong run already. And that leaves shares. With easier interconnectivity between the mainland and Hong Kong for investors, domestic investors could continue to boost long out-of-favour Chinese shares.

This week’s data

There’s not a lot for investors to focus on this week on the data front as we wait for third quarter earnings season to get under way.

Top of the list of potential market movers will be Friday’s labour department update in America. The pace of hiring is expected to have ticked up with the addition of 48,000 jobs compared to 22,000 in August. Jobs data has disappointed in recent months, helping the Fed to justify a return to interest rate cuts and fuelling expectations of more to come as the year closes out.

The prospect of lower interest rates - lower even than the fundamentals might seem to justify, as the government twists the Fed’s arm to ease policy - has been a major driver of share prices since the spring.

Meanwhile, in Europe, the focus is on flash inflation data on Wednesday, with economists expecting a modest rise above target to 2.2%, compared to the 2% the ECB has delivered for three months in a row.

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