Another market sell-off depends on the Fed’s next move, because the current situation very strongly echoes the conditions of 1998, said Jonathan Wilmot, head of macro investments at Credit Suisse Asset Management.
Former Fed chairman Alan Greenspan had said America was an island of prosperity in a sea of difficulty and that’s applicable right now. The Federal Reserve better wait until the global economy starts to show signs of improvement, he noted.
Asked if there are evidences of the global economy gaining momentum going forward, Jonathan said everybody seems to be worried about China right now though things have clearly changed there a bit as they cared more about reforms than growth over the past 18 months. Now they are likely to focus more on growth than reforms.
They would achieve higher growth mostly through conventional monetary policies along with fiscal measures. Markets reacted sometimes ago in anticipation of more easing from the PBOC and that seems to be more plausible now, he observed.
The Global Risk Appetite Index – developed by Wilmot way back in 1998 seems to have improved and trades are tightening. Asked if this indicated a buying opportunity, Wilmot answered in negative saying a bigger buying opportunity arose around the end of last month when markets clearly panicked for two days, possibly due to volatility sellers.
Fundamentals matter a lot and back in 1998 the US economy recovered very strongly because global growth did. There’s some slowdown now and the latest data shows the US has temporarily hit a soft patch though China remains the number one concern for investors.
That said, people seem to be missing a bigger story that took place in the past 18 months in China, which is fascinating; the central government has taken on the debts of local authorities in return for more discipline and control over their spending. The other aspect they need to focus on to make the latest move a success in the long run is that they need to create a large central government bond market that could one day rival the US Treasury market, he noted.
Asked to comment on the kind of growth he’s expecting from China, Jonathan said he doesn’t look at figures like GDP and rather focuses on such numbers as productions etc. China’s production is likely to pick up by the end of this year/going into next year as they commission new projects. The GDP growth is likely to cross 7 percent toward the middle of next year, he argued.
Asked if the European Central Bank will intervene, Jonathan said the ECB would do more if the need arises. If global growth improves, not only the first rate hike by the Fed will be possible, but it will also be bullish for equities and the ECB might not have to do more. But if things deteriorate, they will surely intervene, he concluded.
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