Chinese stocks surge, markets await US interest rates, and Restaurant Group is beating its rivals

“It could be a rollercoaster of a day on the markets as events in China and the US dominate the agenda,” says Russ Mould, Investment Director at AJ Bell.

“After a big sell-off in Chinese stocks on Monday and Tuesday, Beijing has stepped in with pledges of support to try and stabilise markets. This has resulted in a big rebound in the Hong Kong Hang Seng index, up 9.1%, and a massive rally in some of the names worst affected in the sell-off including Tencent (+23%) and Alibaba (+26%).

“Chinese stocks had been hit by fears that the economy would suffer from renewed lockdowns and disruption to the electronics manufacturing hub of Shenzhen, further deterioration in the real estate sector amid bad debts, and the country potentially providing support to Russia in its war on Ukraine. These factors added to existing pressures around tighter regulatory interference on various sectors and whether Chinese companies should still be allowed to list their shares on overseas markets.

“Now Beijing has vowed to introduce policies that benefit markets although the big unknown is still whether the country will side with Russia.

“Investors around the world have increasing put money into Chinese stocks as this market is where some of the best earnings growth stories have been found. Last year’s regulatory clamp-down on internet firms and other sectors soured the appeal of the region to investors but earlier this year sentiment started to improve again.

“The speed at which Beijing has responded to this week’s sell-off would suggest it doesn’t want to let things drift out of control. Its key goal is common prosperity and stock markets matter because a lot of Chinese retail investors have money in equities, so their wealth is at stake if shares are plummeting in value.

“If that hasn’t provided enough drama for the day, markets are also braced for the US interest rate decision later today. The Federal Reserve is widely expected to put up rate by a quarter of a percentage point, but anything more could knock the market for six.

“The central bank has a fine balancing act of taking action to curb inflation while not being too aggressive and tripping up the economy.

“It is coming from a low base which means consumers and businesses should be able to easily stomach a small increase – the key question is how many more rate rises we’ll get and how quickly they will come. Fast and furious could stall the US’s growth engine.

“In the UK, the FTSE 100 jumped 1.4%, led by companies exposed to Asia including Scottish Mortgage Investment Trust, Burberry and Prudential. Coming up the rear were mining stocks including a 3% rise in Glencore and Rio Tinto amid relief that efforts by the Asian superpower to bring market and economic stabilisation should also equate to sustained demand for commodities.”

Restaurant Group

“There are plenty of headwinds facing the leisure sector and all you can ask of businesses in this space is they do better than the wider market and, on this front, Wagamama-owner Restaurant Group is delivering.

“The company continues to outpace its rivals in the recovery from the pandemic. To beat full-year earnings despite the impact of Omicron at the end of 2021 is an impressive feat but what will likely please shareholders even more is the positive outlook for the remainder of this year after a strong start.

“Every part of the business is ahead on a like-for-like basis compared with pre-Covid levels except the concessions based in airports and train stations.

“Wagamama remains a star turn and the proposition clearly still has a big pull with casual diners but company has also worked hard in recent times to fix the parts of the group which weren’t living up to expectations.

“This is probably most notable in its leisure sites, typically located in retail parks close to cinemas, bowling alleys and other entertainment venues.

“Previously brands like Frankie & Benny’s and Chiquito looked tired, but the fat has been trimmed, with underperforming sites closed, and there has been substantial investment in food quality as well as expansion into takeaway and delivery services.

“The improvement is such that they have now gone from being a drag on performance to a strong contributor to Restaurant Group’s revival.

“Restaurant Group is not hiding away despite the challenges posed by a cost-of-living crisis and its own inflationary pressures from rising input costs, with plans to open several new sites in the current year.

“This is underpinned by a drastic improvement in its balance sheet, which also provides some confidence in its ability to ride out any future fluctuations in demand from diners.

“Assuming the company can maintain the outperformance of its peer group it is likely to keep the market on side.”

These articles are for information purposes only and are not a personal recommendation or advice.