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China Is a Big Risk to Long-Term Investors All Over the World

China Is a Big Risk to Long-Term Investors All Over the World
(Dollar Photo Club)

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Wednesday, 07 October 2015 05:16 AM Current | Bio | Archive

In its Global Economic Outlook (GEO), the IMF expects global growth for 2015 to be its worst level (3.1 percent) since the Great Financial Crisis in 2009.

The IMF expects average growth in emerging market and developing economies (EM), now in decline for the 5th consecutive year, could become a major threat to overall growth and could, under a worst case scenario, result in another global recession.

The recovery so far is most advanced in the U.S. and the U.K., where monetary policy tightening is apparently coming nearer, but is expected to remain uncertain in the eurozone (biggest economic entity in the world) and Japan.

In emerging market and developing economies (EM), the origins for slower growth are diverse and range from commodity price declines, which also affect a few advanced economies adversely, to overhangs from past rapid credit growth, especially in the corporate sector,  to political turmoil.

What is worrisome is that the IMF didn’t give a specific cause for that further weakening of global growth. Of course, China’s recent “planned” moves towards more consumption and services have caused compounded pain for many countries that export metals and oil to China.

The IMF warns that the main medium-term risk for advanced economies is a further decline of already-low growth into near stagnation, particularly if global demand falters further as prospects weaken for emerging market and developing economies.

In this context, persistently below-target inflation could become more entrenched. In emerging markets, medium-term risks come from spillovers from a “hard landing” or much slower potential growth in China, or lower potential growth more generally.

In this context, on Tuesday, the SocGen research team gave a 30 percent probability of a “hard landing” in China and a 40 percent probability of a “lost decade” in China.

Interestingly, under a Chinese hard-landing scenario, SocGen expects Brent in 2016 at $36.9/bbl and in 2017 at $44.1/bbl.

In the meantime, the People’s Bank of China (PBoC) informed us that China’s FX reserves had declined further because of interventions in the currency markets, by a record amount of $176 billion in Q3, which was its fifth quarterly decline in a row. China’s FX reserves stand now at $3.51 trillion vs. its $3.99 trillion peak in 2014, which remain of course still sizable reserves.

That said, the IMF warns the implications for growth of a possible a generalized slowdown in emerging market and developing economies would be sizable, with growth rates 1.5 to 2 percentage points lower after five years—even though their model assumes no “sudden stop” in capital flows or crisis outcomes with contagion effects.

Spillovers onto advanced economies would also be material, with growth about 0.2 to 0.3 percentage points lower after five years, depending on whether risk aversion toward emerging market assets increases, and a sizable deterioration in current account balances, despite the partial offset from lower commodity prices.

From a long-term investor’s standpoint the complex “China risk” element shouldn’t be underestimated at all because it could (in my opinion it will) cause emerging market and developing economies significant “structural slowing” as well as continuous “capital outflows” with probably negative spillovers into advanced economies.

The IMF’s baseline expectation of global growth at 3.1  percent in 2015 doesn’t provide any form of solid incentive/security for investing at present in markets overall.

By the end of the day, for long-term investing it all will come back to fundamentals/basics, as it will become extremely difficult for making real business generated profits, not financially engineered earnings, in close to stagnation or even recession bound (hopefully not) economies.

Yes, rough times ahead. The good times for long-term investing are still not even on the horizon.

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HansParisis
In its Global Economic Outlook (GEO), the IMF expects global growth for 2015 to be its worst level (3.1 percent) since the Great Financial Crisis in 2009.
china, invest, risks, economy
606
2015-16-07
Wednesday, 07 October 2015 05:16 AM
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