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Brandywine: Global managers see increased China risk

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Brandywine: Global managers see increased China risk

Weakening Chinese growth could impact global markets.

At a recent conference in London to discuss prospects for the often unpredictable global financial markets, portfolio managers were asked, “What risks do you think are not fully appreciated by investors now?”

Their answers covered several broad areas, but for asset manager Brandywine Global, the focus settled squarely on China.

“A principal risk that is not being considered by most investors is the structural decline in growth rates in China,” said Gary Herbert, Global Credit portfolio manager with Brandywine Global. “When we look at retail sales, rail car shipments, vehicle sales, retail sales – they are at effectively Depressionary levels. When we look at producer price indices, those numbers have been negative for roughly 36 months.”

“If structural consumption and economic growth does not occur in China, this could have a very negative knock-on effect in many emerging markets.”

“The reason China’s economy has been struggling is that monetary policy is just way too tight."

His views were echoed by co-lead portfolio manager of Global Fixed Income with Brandywine Global, Steve Smith: “To me this big bust in commodity prices that we’ve seen in the world, the big slowdown in global growth, is a combination of not just the Europeans but also the Chinese, which are the second and third-largest economies in the world.”

In 2014 most market watchers were focused on monetary policy in Europe. That culminated on March 9, when ECB President Mario Draghi announced the central bank would pursue quantitative easing.

“What they really missed is what was going on in China,” Mr. Smith said. “PPIs have been negative for 37 consecutive months and the country’s headline consumer inflation rate is lower than the U.S.’s in 2012, yet real short-term interest rates are at 10%. Not only that, but China loosely pegs its currency to the U.S. dollar. The dollar, Swiss franc and of course the Chinese renminbi are the three strongest currencies in the world. Can you imagine 10% real rates for an economy with such a strong currency?”

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