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China slowdown could spark another correction

Royal London's Trevor Greetham is predicting a slowdown in the Chinese economy in the second half of the year.

 
China slowdown could spark another correction
 

A slowdown in China later in the year could kick-start another stock market correction and temper the need for swift interest rate rises, according to  Trevor Greetham, manager of the Royal London multi-asset fund range.

Greetham predicted the Chinese economy would slow in the latter part of the year which could create a ‘deflationary shock’.

‘A slowdown would hurt earnings expectations and we could see another correction in the stock market but it would be a different type of correction [to earlier this year] because it would mean central banks elsewhere would not have had to raise interest rates,’ he said.

A China-led correction would ‘take inflation out of the picture’ which would be good for investors, said Greetham.

‘After a short period, markets would come out feeling happy because it would take [markets out of] overheat [mode] and back to a disinflationary recovery stage,’ he said.

He likened China’s role to that of Japan’s in the 1990s, as keeping inflation low due to its slowing economy.

However, investors do not need to move their portfolios to accommodate this slowdown just yet.

‘We are not positioned for a China-based slowdown,’ said Greetham. ‘If there was evidence that it was happening now we would reduce exposure to Japan and emerging markets and increase exposure to bonds, and there will come a time – I guess during the summer – that we will see a rotation.’

A stymieing of interest rate rises  and a slowdown in inflation could prolong the current economic expansion and delay a more severe market fall, said Greetham.

‘There has been an extremely long business cycle and it will carry on for some time to come, mainly because inflation is quite low and interest rates are quite low,’ he said.

However, Greetham (pictured) said inflation pressure was starting to build and stocks normally did best when there was ‘strong growth and falling inflation’.

‘We are seeing strong growth and strong earnings supporting higher stock prices but the fear of higher interest rates can cause a derating of equity valuations, like we saw in February,’ he said.

Despite the risk of interest rate rises across the globe, Greetham said they were still at ‘extremely low’ levels and were a long way off becoming so high that they threatened economic growth.

Greetham has positioned the multi-asset funds for a strengthening in global markets but has hedged his bets when it comes to the direction of the dollar.

‘We are overweight in regional equities to Japan and emerging markets,’ he said. ‘Both do well when the world economy is strong but if there are clear indications of a slowdown that reduces their attractiveness.’

He added that if the dollar was strong that was good for Japan as it exported a lot to the US but if the dollar weakened, it would be better for emerging markets because they ‘export a lot of commodities and when the dollar is weak, commodity prices are stronger’.

3 comments so far. Why not have your say?

MIKE I

Mar 22, 2018 at 15:22

Watch the dollar. China will turn when the dollar starts to strengthen and, given the current bearish sentiment on the dollar, that turnaround could be pretty sharp!

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mc2

Mar 22, 2018 at 15:51

"He added that if the dollar was strong that was good for Japan as it exported a lot to the US but if the dollar weakened, it would be better for emerging markets because they ‘export a lot of commodities and when the dollar is weak, commodity prices are stronger’."....

Not clear to me why a strong dollar is better for Japan exports and a weak dollar would be better for emerging markets commodity exports?...

If a strong dollar is good for Japan exports, why is not the same for the emerging market exports?...

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Jim S

Mar 23, 2018 at 13:24

Me neither mc2. Wouldnt the bigger reason for the difference be Japanese dollar holdings vs EM dollar debt?

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