With the People’s Bank of China having cut the yuan-dollar peg by 2.9% in less than 48 hours – 1.9% on 11 August and a further 1% the following day – fears of deflation spreading through the global market are starting to manifest.
But while some are running scared, not only is Greetham, RLAM’s head of multi asset, decidedly sanguine, he even described the potential deflation wave as bullish for markets.
Intertwining influences
“How can investors worry about the deflationary effect from China and the Fed rate rise in the same breath?” he said.
“As global investors, we should not be worried about slowing Chinese growth being deflationary for the rest of the world, because it stops the Federal Reserve from hiking interest rates too much. Ironically, the last thing that we want at the moment is China booming.”
Greetham explained that the juxtaposition of slowing Chinese economic growth against its European and Japanese counterparts will pull global stock markets back from overheating and reinstate deflationary recovery.
“If China was booming alongside the US, Europe and Japan doing well, then commodity prices would go up, and we would see a real market overheat,” he said.
“Suddenly we would be in a much bigger rate hike environment, which would be quite dangerous. So, as long as the yuan devaluation is managed and controlled, I see it as quite bullish for the rest of the world, because it takes us from overheat back into deflationary recovery.”
Sceptical yet positive
Despite the Chinese authorities’ assurances that the yuan-dollar cuts do not represent the start of ongoing depreciation, Greetham sees more on the horizon and his equities outlook is more positive for it.
“This is the start of a big valuation move, which could be up to 15% and become more meaningful,” he said.
“With stuttering global growth you want global disinflation. If we look back to Japan slowing down in the 90s, it kept commodity prices falling and policy loose, and eventually the S&P doubled twice. We ended up with very expensive stock valuations – I think this is going to end the same way, but we are not remotely near there yet.”
Accordingly, Greetham’s portfolio is overweight Europe and Japan, where he is long equities and short the euro and yen; conversely, his underweight to emerging markets is indicative of a gloomy medium-term outlook.
“The combination of China slowing and the Fed tightening is really bad news for emerging markets,” he expanded.
“As a group, emerging markets are commodity price and dollar-sensitive, and the dollar strengthening could put a lot of pressure on them. If there is long period of dollar strength then there will be quite a lot of concern over what will happen to the financial systems in emerging markets.”
