Multi Asset
June 2017

China Has Taken a Whack-a-Mole Approach

China Has Taken a Whack-a-Mole Approach
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What does uncertainty do to risks? Newton Investment Management’s global real return manager, Iain Stewart, outlines what the current economic and political backdrop may mean.

DOES UNCERTAINTY EQUAL RISK?

The uncertainty of the investment backdrop is perhaps an impression conveyed solely by the media, given financial markets imply investors believe the opposite, says Stewart. High valuations across major markets infer investor optimism rather than nervousness, he notes, and much of this is based on the belief that global reflation is underway. “We’re not convinced by that idea,” he adds.

There are reasons to be hopeful, he believes, pointing to the new U.S. administration’s talk about tax cuts, reforms and increased infrastructure spending. However, Stewart also notes that President Trump’s timescale looks, in his opinion, to be way too optimistic. “Trump is unpredictable and inconsistent, so it is hard to see his plans as a bullish indicator.”

Growth, he argues, depends on more than just the policy backdrop—ultimately it hinges on demography and that is hard to change. “The economy isn’t a machine and there are all sorts of unintended consequences of policy. Just look at quantitative easing—it was supposed to be a one-off and it has morphed into a semi-permanent state that is increasingly hard to exit.”

SCENE CHANGE

Interestingly, Stewart points out, while asset support continues on a global scale, the actors have changed. What started with economies such as the U.S., UK and even China has moved to the Bank of Japan and the European Central Bank. China also continues to take action, with Stewart calling the situation there the equivalent of “policy whack-a-mole.” He notes that as China resolves one issue, another pops up somewhere else—moving from property concerns in recent years to credit worries now. He is uneasy not just about the scale of China’s credit growth, but also its speed. “It is not quite the levels of Ireland during its bubble but it is approaching it. More recently, because they switch things on and off (in order to try to control speculation), what China is doing seems to be the main driver for the headline global level of asset purchases.”

However, the view of the world, and hence the global recovery, has become very U.S.-centric in Newton’s opinion, leaving few concerned about the state of China’s growing debt.

With all the added uncertainty this has created, the global real return team has maintained its defensive stance focused strongly on capital preservation. “Are the current levels of valuations justified? We don’t think so. If bond yields are low and the world is challenged on a number of fronts, it doesn’t make sense to me to keep paying more. We believe it is right to be patient and stand back.”

UNWARRANTED OPTIMISM?

Stewart favors high-quality equities over investment-grade debt, although within the latter he does like those that are asset-heavy. Credit is at one of its lowest-ever levels, although there is high government exposure as a result of hedging. Precious metals can act as a hedge if authorities get the inflation they appear to be seeking, Stewart concludes.

BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers. It encompasses BNY Mellon’s affiliated investment management firms, wealth management services and global distribution companies. More information can be found at www.bnymellon.com.

RISKS

Equities are subject to market, market sector, market liquidity, issuer, and investment style risks, to varying degrees. There is no guarantee that dividend-paying companies will continue to pay, or increase, their dividend. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries.

INDEX DEFINITIONS

VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. Global Economic Policy Uncertainty (EPU) Index calculated as the GDP-weighted average of monthly EPU index values for U.S., Canada, Brazil, Chile, UK, Germany, Italy, Spain, France, Netherlands, Russia, India, China, South Korea, Japan, Ireland and Australia, using GDP data from the IMF’s World Economic Outlook Database.

“Newton” and/or the “Newton Investment Management” brand refers to the following group of affiliated companies: Newton Investment Management Limited, Newton Investment Management (North America) Limited (NIMNA Ltd) and Newton Investment Management (North America) LLC (NIMNA LLC). NIMNA LLC personnel are supervised persons of NIMNA Ltd and NIMNA LLC does not provide investment advice, all of which is conducted by NIMNA Ltd. NIMNA LLC and NIMNA Ltd are the only Newton companies to offer services in the U.S. Newton is a wholly owned subsidiary of The Bank of New York Mellon Corporation.

Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. BNY Mellon Asset Management Canada Ltd. is an indirect wholly-owned subsidiary of The Bank of New York Mellon Corporation (BNY Mellon). BNY Mellon Asset Management Canada Ltd., 200 Wellington Street West, Suite 305, Toronto, ON M5V 3C7.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. The Dreyfus Corporation, Newton and MBSC Securities Corporation are companies of BNY Mellon. ©2017 MBSC Securities Corporation, Distributor, 225 Liberty Street, 19th Fl., New York, NY 10281.

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