Last week saw significant news across the US, China and the UK. The rise of COVID-19 and regulatory actions are impacting markets, but Citi analysts think some concerns are overstated while others are underappreciated.

US Growth in the Face of Rising COVID-19

The rising rates of the Delta variant are putting a damper on the US recovery, for now. There is a decline in commuting and travel activity in the US, while local retail traffic has continued to improve. Citi analysts expect that the impact may continue to grow across the US over the next 6-8 weeks impacting school opening schedules as well as “back to office” plans for companies.

A sharp decline in consumer confidence has yet to materialize in concrete data, though last week’s retail activity figures suggested some normalization in demand, while supply shortages persist. The spreading Delta variant has also yet to impact the employment recovery.

Last week’s initial jobless claims data continued to decline, falling to new post-pandemic lows. Citi analysts are watching closely for any potential impacts from a struggle to reopen schools or any large-scale shutdowns that may be implemented.

The Market in China: Regulatory, Political and COVID-19 Headwinds

China’s economy is slowing due to its response to the Delta outbreak. China has handled the pandemic much differently than the West, imposing strict regional lockdowns following even the most limited flare-ups. With a much lower vaccination rate and available vaccines that are less effective against COVID-19, China’s prevention efforts may have a more negative impact on its domestic economy than experienced in the West.

Amid signs of a slowing economy, the Chinese government moved to reduce bank reserve requirements last month, and Citi analysts expect further easing actions to support the real economy ahead of the National People’s Congress next year.

The recent series of Chinese regulatory crackdowns has caused investors to question the efficacy of investing in China. Citi analysts do not believe China has become uninvestable. The government’s goal has been and continues to be the “rise of the middle class” and recent regulatory policies are largely consistent with that objective.

For example, the tech regulations mirror concerns and proposed anti-monopoly legislation in the West, aimed to allow small- and medium-sized companies to compete. This could potentially benefit Chinese consumers over time.

UK Sees Rising Share Buybacks, Dividend Increases and M&A Activity

The UK market has risen 11.2% so far this year and 17.2% over the past 12 months. However, it is still 7% below the pre COVID-19 high and 10% below the all-time high.

In addition to a 60% increase in EPS this year, market valuation is also low at 13X. There are now clear catalysts for value to be unlocked, with the sharp rise in share buyback activity, companies resuming dividend payments and many raising their dividend payouts.

There are two trends gathering momentum and both are the result of rising cashflows.

First, there are more companies resuming dividend payments, and in many cases, raising their dividend payout rates.

Second, many companies are now looking to raise their returns on equity through share buybacks. They are taking both of these actions to bolster their share prices, by offering more dividends, more growth, or sometimes both.

The two most undervalued sectors – banks and energy – are leading the way.