China: advance or nonsense for technology investors?
America and China are vying for technological power. What about the rise of humanoid robots and quantum computers, for example? Will China become the next superpower? Mark Van Assche, account manager Private Banking and Wealth Office, talks about it with Anthony Cruysmans, equity portfolio manager at KBC Asset Management.
04/06/2025
Economy
- The American consumer is pivotal to the US economy. However, the trade war is creating a huge amount of uncertainty. With a temporary truce being declared (including with China), an escalation seems to have been avoided. Our economists expect growth to be meagre in the second half of the year.
- In Europe, additional public spending on defence and infrastructure appears to be bolstering optimism about growth in the medium term. However, the expected boost to growth may be tempered by US import tariffs.
- Recent (PMI, ISM and other) figures indicate continuing weakness. The manufacturing sector appears to be weakening further in the US, while similar figures in the euro area continue to point to a minor contraction in activity.
Commodity prices - inflation
- For the time being, inflation rates are continuing to move in the right direction, thanks in part to lower oil and gas prices. The latest official inflation figures also confirm this trend in both the US and the euro area.
- However, figures from the ISM show that purchase prices in the US are quite high. Trump's policies are therefore expected to send inflation systematically higher over time.
Fiscal and monetary policy
- The US government promised to reduce government spending through DOGE in order to fund tax cuts elsewhere. It seems unable to deliver on that initial promise, threatening to derail the budget deficit further.
- China continues to regularly support its flagging economy through new policy decisions. In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape, although it looks like their impact won’t be felt until 2026-27.
- In June, the ECB cut its key rate by another 25 basis points. We expect that the Fed, too, will ease its key rate later this year when growth is forecast to slow down.
- We expect the ECB to trim its key rate one more time later this year.
Bond markets
- Bond markets are also reeling from the trade war and are anticipating an adverse impact on economic growth and (expected) further cuts in key rates. As a result, yields are falling on sovereign bonds.
- This is largely offsetting the increase in German interest rates at the start of this year.
- US interest rates are falling less sharply for now, as the uncertainty surrounding US debt has increased.
Stock markets
- Taking a 90-day pause before the high import tariffs of ‘Liberation Day’ take effect has given stock markets some breathing space, especially now that a similar agreement has also been reached with China.
- Company results that clocked up better-than-expected earnings growth of 10% in the US and limited the damage to -5% in Europe have also supported sentiment. However, another feature of the results season was that many companies downgraded their forecasts or even stopped publishing them given the high level of uncertainty. Analysts are still adjusting their projections for earnings growth downwards although the pace has slowed slightly.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness. As far as what will happen to the aid to Ukraine, Border disputes are also on the rise between India and Pakistan.
- Moreover, support for the German government seems limited, which may affect planned spending.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
Agreement on tariff negotiations with China puts the trade war on hold and gives stock markets confidence. Pending the outcome of the talks, we are adopting a neutral stance on shares again, but remain vigilant about the impact on the global economy of import duties already in place
Siegfried top, Senior Investment Strategist KBC Asset Management
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