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Rate Cuts Drive Next Leg of Equity Market Rally
China Macro Monitor November 2014 Rate Cuts Drive Next Leg of Equity Market Rally. This publication is a monthly report focusing on macro developments in China relevant to investors across asset classes and markets.
Summary
- Last week the People’s Bank of China (PBoC), the central bank, stepped up its fight against flagging growth and deflationary headwinds by cutting interest rates for the first time since 2012.
- The PBoC had been active this year in delivering very targeted policy easing and injecting liquidity into the banking system. However, last week’s move marks the first broad-based monetary easing action in over two years. We believe there will be more to come.
- We believe the PBoC will cut the reserve requirement ratio (RRR) as well as cut interest rates further as it aims to generate sustainable demand in the economy and ward off rising deflationary risks.
- The PBoC also increased the flexibility of banks to set deposit rates, highlighting its commitment to increasing financial market liberalisation.
- The Hong Kong-Shanghai Stock Connect opened for business earlier this month. The daily quota was hit on the first day of trading, illustrating the strength of pent up demand for domestic Chinese equities.
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PBOC CUTS POLICY RATES AND ADVANCES ON RATE LIBERALISATION
We have long argued that weak economic data and the threat of deflationary pressures will expedite policy stimulus from both the Chinese government and central bank. The PBoC has been very active in recent months in delivering targeted policy easing and injecting liquidity into the banking system. Last week’s moves however demonstrate that the central bank has stepped up its fight and marks the first time the PBoC has cut key policy rates since 2012. The PBoC cut the 1-year benchmark lending rate 40bps (to 5.6%) and cut the 1-year deposit rate by 25bps (to 2.75%).
At the same time the PBoC raised the deposit rate ceiling (the limit on deposit interest rates, expressed as a multiple of the benchmark deposit rate) to 1.2 from 1.1 times previously. Deposit caps have been a constraint on the formal banking system and have led to the growth the shadow-banking system which does not face the same draconian constraints. The moves to widen the ceiling illustrate that policy easing and liberalisation can go hand-in-hand. While the net effect on deposit rates for this first rate cut could become muted if all banks utilise the new ceiling1, the moves highlight policymakers’ commitment to supporting growth and liberalising financial markets.
We believe last week’s rate cuts will be the first in a series of cuts that will be necessary to stimulate the economy. A further 50bps could be cut in H1 2015.In addition we believe that China will cut the reserve requirement ratio (RRR) i.e. the amount of deposits and notes that banks must hold as reserves at the central bank. Cutting the RRR expands the capacity of banks to lend into the real economy. Although the PBoC cut the RRR for select banks earlier this year, we believe that a broad-based cut is now required
With shadow banks taking a back-seat, the onus is on the formal banking sector to provide financing into the economy. The banking sector therefore needs all the support it can get from the central bank.
The PBoC took further steps to liberalise interest rates by abolishing the benchmark guidance for 5-year savings rates and consolidated the benchmark guidance for loans of 1-5 years maturity. These moves allow regulated banks to attract more deposits that would have gone to shadow banks and therefore should aid their ability to lend
On 27th November, the PBoC refrained from selling repurchase agreements for the first time since July, loosening monetary policy further. It last suspended sales of repos, in the week of July 21 as initial public offerings boosted cash demand. This time the motivation seems more aligned with monetary stimuli. The sale of repos drain funds from the banking system. Indeed the PBoC could conduct reverse repos to increase liquidity in the banking system, a tool which we believe it will utilise in 2015.
The Renminbi depreciated modestly in November, helping to boost the competitiveness of Chinese exports. Exports were already been growing briskly during a period of Renminbi appreciation. The recent depreciation should act as a catalyst to extend that growth and is in line with the recent monetary easing efforts by the central bank.
HONG KONG-SHANGHAI STOCK CONNECT OPENS FOR BUSINESS
The Hong Kong-Shanghai Stock Connect programme, which allows foreigners access to the domestic equity market in China via Hong Kong, started on November 17th. This initiative marks the most substantial opening of the Chinese equity market in history. On the first day of trading, flows from Hong Kong to China hit the daily quota, in a sign of the strength of pent up demand for Chinese equity exposure. Coinciding with the opening of the Connect programme, capital gains tax on investments by foreigners has been waived for three years and the cap on HK dollar-yuan convertibility was lifted for Hong Kong residents in another significant sign of willingness to liberalise financial markets.
In June 2014, MSCI refrained from including China A-Shares into its MSCI Emerging markets Index due to concerns over difficulty in accessing the market. The Connect initiative should go a long way in alleviating these concerns. With approximately US$1.5tn benchmarked to MSCI China Emerging Markets Index, even a small allocation of 0.5% to the China A-Share market in the broader index could drive US$7.5bn into the market on the back of index replication by investors. With equity markets becoming more optimistic on index inclusion, China A-Shares have staged a rally.
As a point of reference, the MSCI United Arab Emirates Net TR USD index rose over 90% between the time MSCI announced UAE stocks would enter its Emerging Market Index and actual inclusion (see shaded area of chart). While the Chinese and UAE markets are vastly different in size and composition and therefore limits comparability, we believe the increasing probability of index inclusion will bode well for China A-Shares.
The Hong Kong-Shanghai Connect programme does not open the Shenzhen market up to foreigners and for that reason many investors prefer investment products benchmarked to broad indices with exposure to all A-Shares such as the MSCI China A-Share Index.
1 If banks fully utilize the new deposit ceiling, the new deposit rate will be 2.75%*1.2 = 3.3%, same as 3.00%*1.1 =3.3% under the old deposit rate and deposit ceiling.
Important Information
This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).
2024 was a landmark year for bitcoin, solidifying its role as a fully institutionalised asset class.
Institutional inflows into physical bitcoin exchange-traded products (ETPs) reached nearly $35 billion globally, signalling a major shift in how traditional investors view crypto. As bitcoin continued to enhance portfolios’ risk-return profiles, more institutional investors followed suit, reshaping the financial landscape.
Looking ahead, 2025 promises to bring exciting developments across the crypto ecosystem. Here are the top five crypto trends to watch.
Fear of being left behind
The era of bitcoin as a niche investment is over. Institutional adoption is creating a ripple effect, forcing hesitant players to reconsider. Portfolios with bitcoin allocations are consistently outperforming those without, highlighting its growing importance.
Figure 1: Bitcoin in a multi-asset portfolio
| 60/40 Global Portfolio | 1% Bitcoin Portfolio | 3% Bitcoin Portfolio | 5% Bitcoin Portfolio | 10% Bitcoin Portfolio | MSCI AC World | Bloomberg Multiverse | Bitcoin | |
| Annualised Return | 5.77% | 6.46% | 7.83% | 9.20% | 12.57% | 9.07% | 0.56% | 56.24% |
| Volatility | 8.79% | 8.86% | 9.14% | 9.62% | 11.42% | 13.94% | 5.05% | 67.28% |
| Sharpe Ratio | 0.48 | 0.55 | 0.68 | 0.79 | 0.96 | 0.54 | -0.20 | 0.81 |
| Information Ratio | 1.01 | 1.01 | 1.01 | 1.00 | ||||
| Beta | 70% | 71% | 73% | 75% | 81% | 100% | 24% | 181% |
Source: Bloomberg, WisdomTree. From 31 December 2013 to 30 November 2024. In USD. Based on daily returns. The 60/40 Global Portfolio is composed of 60% MSCI All Country World and 40% Bloomberg Multiverse. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investment may go down in value.
With bitcoin’s ability to noticeably improve portfolios’ risk-return profiles, asset managers face a clear choice: integrate bitcoin into multi-asset portfolios or risk falling behind in a rapidly evolving financial landscape. In 2025, expect the competition to heat up as clients demand exposure to this powerhouse cryptocurrency.
Expanding crypto investment options
In 2024, regulatory breakthroughs opened the doors for physical bitcoin and ether ETPs in key developed markets. This marked a critical step towards making cryptocurrencies mainstream, providing seamless access to institutional and retail investors alike.
Figure 2: Global physical crypto ETP assets under management (AUM) and 2024 net flows
Source: Bloomberg, WisdomTree. 02 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
In 2025, this momentum is expected to accelerate as the crypto regulatory environment becomes more friendly in the United States and as key developed markets follow Europe’s lead and approve ETPs for altcoins such as Solana and XRP. With their clear utility and growing adoption, these altcoins are strong candidates for institutional investment vehicles.
This next wave of altcoin ETPs will expand the diversity of crypto investment opportunities and further integrate cryptocurrencies into the global financial system.
The maturing of Ethereum’s layer-2 ecosystem
Ethereum’s role as the backbone of decentralised finance (DeFi), non-fungible tokens (NFTs), and Web3 is unmatched, but its scalability challenges remain a hurdle. Layer-2 solutions—technologies such as Arbitrum and Optimism—are transforming Ethereum’s scalability and usability by enabling faster, cheaper transactions.
In 2025, Ethereum’s recent upgrades, such as Proto-Danksharding (introduced in the ‘Dencun’ upgrade), will drive layer-2 adoption even further. Innovations like Visa’s layer-2 payment platform leveraging Ethereum for instant cross-border transactions will underscore the platform’s evolution.
Expect Ethereum’s layer-2 ecosystem to power real-world use cases ranging from tokenized assets to decentralised gaming, positioning it as the infrastructure of a truly scalable digital economy.
Stablecoins: bridging finance and blockchain
Stablecoins are becoming indispensable to the global financial system, offering the stability of traditional assets with the efficiency of blockchain. Platforms such as Ethereum dominate the stablecoin landscape, hosting stablecoin giants Tether (USDT) and USD Coin (USDC), which facilitate billions in daily transactions.
Figure 3: Key stablecoin chains
Source: Artemis Terminal, WisdomTree. 05 January 2025. Historical performance is not an indication of future performance and any investment may go down in value.
As we move into 2025, stablecoins will increasingly interact with blockchain ecosystems such as Solana and XRP. Solana’s high-speed, low-cost infrastructure makes it ideal for stablecoin payments and remittances, while XRP Ledger’s focus on cross-border efficiency positions it as a leader in global settlements. With institutional adoption rising and DeFi applications booming, stablecoins will serve as the backbone of a seamless, interconnected financial ecosystem.
Tokenization: redefining ownership and revolutionising finance
Tokenization is set to redefine how we think about ownership and value. By converting tangible assets like real estate, commodities, stocks, and art into digital tokens, tokenization breaks down barriers to entry and creates unprecedented liquidity.
In 2025, tokenization will expand dramatically, empowering investors to own fractions of high-value assets. Platforms such as Paxos Gold and AspenCoin are already showcasing how tokenization can revolutionize markets for gold and luxury real estate. The integration of tokenized assets into DeFi will unlock new financial opportunities, such as using tokenized real estate as collateral for loans. As tokenization matures, it will transform industries ranging from private equity to venture capital, creating a more inclusive and efficient financial system.
For the avoidance of any doubt, tokenization complements crypto by expanding the use cases of blockchain to include real-world applications.
Looking ahead
2025 is set to be a defining year for crypto, as innovation, regulation, and adoption converge. Whether it is bitcoin cementing its position as a portfolio staple, Ethereum scaling for mainstream use, or tokenization unlocking liquidity in untapped markets, the crypto ecosystem is poised for explosive growth. For investors and institutions alike, the opportunities have never been clearer or more compelling.
This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.
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