Executive Summary | Three Core Convictions | United States | China | Eurozone | Japan | Investment Implications
Housing and Consumer Confidence
China’s economy might also be more fragile than it appears. Real GDP is growing, but a closer look reveals an ongoing housing crisis that continues to depress consumer confidence.
Assessing the state of the Chinese housing market can be challenging given very different readings from different data providers,2 but the latest data suggest that prices for previously occupied homes have declined anywhere from ~20% to ~56% across China’s top six cities (Exhibit 7). Given that the median household in China has about 60% of its assets invested in housing, these declines weigh heavily on the typical consumer’s balance sheet and spending appetite.
Unsurprisingly, consumer confidence remains near record-low levels (Exhibit 8). From early 2025, there were signs of a slight uptrend in confidence, but more recent data have raised questions regarding the sustainability of the improvement.
EXHIBIT 7
Private Sector Housing Data Suggest Sharp Home Price Declines
As of April 2026
Source: Centaline, Morgan Stanley
EXHIBIT 8
Chinese Consumer Confidence Remains Near Record-Low Levels
As of April 2026
Source: Chinese National Bureau of Statistics, Haver Analytics
China’s K-Shaped Economy and the Need for Structural Reforms
China continues to report real GDP of ~5% per annum, as “new economy” sectors such as electric vehicles and energy transition products grow rapidly and gain market share globally. But the quality of China’s economic growth has deteriorated as domestic drivers weaken and the country becomes more dependent on exports.
In recent months, industrial production has grown by 4%–6% year-over-year while retail sales fell year-over-year in May for the first time since the COVID pandemic, as manufacturers produced more goods than domestic consumers could buy. Rather than pursuing the structural reforms needed to strengthen consumption, however, the government appears to be doubling down on central planning and industrial policy—a model built on suppressed domestic wages, elevated savings rates, and export dependence that looks increasingly unsustainable.
In my view, the top priority should be addressing structural inequality. This would mean significantly improving the social safety net for rural workers, who typically earn the lowest wages and receive minimal government benefits in retirement. Approximately 180 million Chinese citizens receive an average benefit of RMB246 per month, which equates to $34 per month.3 By contrast, about 120 million urban retirees receive a much more generous benefit of RMB3,498 ($485) per month, while the roughly 20 million government retirees receive RMB6,243 ($867) per month. While some differentiation in retirement payments is warranted due to the cost of living in cities versus rural areas, this level of rural deprivation is extreme and could easily be alleviated without significant adverse consequences.
Encouragingly, some National People’s Congress members called for higher farmers’ pension payments in the 2026 Two Sessions. If the Chinese government were to enact such reforms, I believe the growth outlook for China would be brighter over a considerably longer time horizon than it is today, as consumer spending would increase while fears of outliving savings would decrease.
China’s Export Engine
In the absence of the historical tailwinds from infrastructure and real estate construction, China’s export engine has become increasingly important to driving growth. In 2025, ~33% of China’s real GDP growth was driven by net exports—the highest level since 1997— and the trade surplus reached $1.18 trillion or ~6% of GDP (Exhibit 9). Despite the US-initiated trade war in 2025, China’s exports rose to a new record of over $370 billion in May 2026, a 19% increase from the comparable periods in 2025. Not all of the increase, however, has been due to market share gains. China has also been a beneficiary of the AI-related capex boom with demand for legacy semiconductors and other technology equipment rising sharply, leading to price increases versus historical price erosion.
EXHIBIT 9
China’s Trade Surplus Reached $1.18 Trillion in 2025
As of December 2025
Source: China Customs General Administration, Haver Analytics
Eurozone
Europe’s anticipated 2026 recovery was derailed by the Iran war but I believe increased defense spending brightens the region’s long-term growth prospects.
Japan
Japan’s corporate reform agenda continues to bear fruit, while rising rates could contribute to the strengthening of the yen against the US dollar and other currencies.
Investment Implications
As allocators recalibrate, I anticipate a rotation away from US equities, growing demand for EM debt, and heightened interest in real assets.
Three Core Convictions
A weakening US dollar will cause investors to rethink their US exposure; steeper yield curves will follow widening fiscal deficits; non-US equities will gain traction.
United States
While AI-driven tailwinds continue to lift US equity market performance, underlying economic resiliency seems increasingly dubious.
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Important Information
Notes
2. This analysis relies on Centaline’s home price data, published by Centaline Property Agency Limited. Even though Centaline only capture homes listed on its platform in six major Chinese cities, it better captures price volatility as housing sentiment shifts than the National Bureau of Statistics data, which tends to understate price volatility and largely excludes discounting from reported prices.
3. Data as of 2024.
Published on 24 June 2026.
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