With regards to China, there are three main questions that need to be addressed: 1) Does it have a serious economic problem? 2) Can it deal with it? 3) If the Chinese economy blows up, what will happen?
“The elephant in the room is China,” said David Stubbs, global market strategist at JP Morgan. “The authorities are clearly struggling to get to grips with a new currency regime at the same time as navigating the many structural and cyclical challenges they face.”
“Investors entered the year looking for signs that the Chinese economy was stabilizing. Alas we have seen the opposite. But it is worth remembering that most investors’ have limited direct exposure to Chinese assets. If and when investors gain more confidence in the consumption-led recovery in US and Europe we would expect worries over China to have less global impact”, added Stubbs.
JP Morgan believes that, on average, developed world consumers can carry the recovery forward this year on both sides of the Atlantic. “But at this stage in the business cycle the expected returns to most traditional forms of investment are relatively low and investors know that policy makers have less room to respond to trouble than they did in 2008,” said Flanders.
“We should expect China and other worries to hold back sentiment in this kind of environment, even though we judge the risks of a full-blown recession in Europe and the US to be reasonably low,” she added.
Flanders mentions political risks such as the UK referendum on EU membership, the European migrant crisis, the worsening situation in the Middle East and the presidential election in the US as other key looming concerns.
