Uncategorized

ASX 200 Outlook Hinges On Fiscal Support As Covid-19 Cases Surge

ASX 200 Outlook Hinges On Fiscal Support As Covid-19 Cases Surge ENDPARAM

China’s construction boom is providing some compelling support for the ASX 200, with the outlook for construction activity now more favourable than before the global economic downturn. Chinese construction firms are now active in many areas of the real estate market and sectors such as health care, education, finance and IT are seeing a renewed energy and impetus.

As well as helping to underpin the fortunes of other companies in the international construction sector, the ASX 200 will also be benefiting from the increase in demand for the homes of the many Chinese citizens who have come to Australia for work or study. In addition, with the fiscal stimulus package being put in place by the Government in an effort to stimulate the Australian economy, the housing sector is expected to see more development of new homes in order to meet rising housing demand.

However, for the ASX to continue to thrive in the face of all this demand and competition, one thing it cannot do is ignore the negative aspects of the recent global economic downturn. A number of issues facing the ASX still include worries about the economy, concerns over the state of the Chinese economy, concerns over emerging issues in the North American economy and the impact of uncertainty on financial markets.

In this article we take a look at some of the aspects of the global economic climate that could affect the ASX in coming quarters and beyond. One concern is that a slowdown in the Chinese economy could result in China’s currency losing value.

This will have a direct effect on the Australian dollar, which is currently trading at around US50c, although the currency has already declined slightly in recent weeks as investors realise that a weaker Chinese economy would help Australia. If the China currency continues to weaken, a greater risk then exists for a further depreciation of the Australian dollar.

A second concern relates to the state of the Chinese economy, and particularly the trend in the latest quarterly GDP figures. While the September quarter numbers had been disappointing and at best somewhat mixed, many economists now think that growth will pick up as the Chinese economy continues to grow.

There is a sense that the recent fall in the exchange rate may have been driven more by the effort by the US Federal Reserve to stimulate the United States economy than by China’s difficulties. Thus, China may not have been as adversely affected by the economic turmoil in the United States, but there is the potential for the devaluation of the Chinese currency to hurt ASX stocks.

Furthermore, as was the case in 2020, many analysts are worried about the stability of the Chinese economy and whether its continued strength will be sustained. A recent survey suggested that about half of the Chinese believed the economy would experience severe problems and would continue to move downwards in the next six months.

The same survey also showed that half of those surveyed believed that the Bank of China and its efforts to boost the economy were aimed mainly at boosting government revenue. Some Chinese commentators and economists are concerned that any excessive focus on tax collections, rather than spending, could lead to the dismantling of China’s currency.

Further, the State Council has warned that China should remain watchful of the ‘overvalued’ US dollar and should not allow its currency to weaken. In addition, the State Council said that it expects the rate of the renminbi to depreciate further, but would prevent its depreciation from becoming too fast.

Overall, the outlook for the ASX remains positive, but the global environment remains challenging. Hence, the question remains what impact will an increasingly weakened China have on the ASX’s growth prospects.