Chinese ahead of the game?

Greetham explained that while global growth has recovered quite strongly since the low levels seen in 2008, there are now signs that momentum is waning. Classic examples of slowing growth are currently present, he said, such as weakening equity markets and falling government bond yields.

Greetham had a response for anyone who was puzzled as to why Spain and Greece are seeing increasing bond yields. “Clearly, in the fixed exchange rate regime of the Euro, these countries are more likely to default if growth slows down because they don’t have the option of what they would have done in previous years, which is devalue,” he said.

He believes that central banks will act later this year and print money or cut rates where they can.

Deflation
The global economy needn’t worry about inflation, he argued. The real threat is deflation. “There’s a lot of spare capacity in the developed economies and central banks can and will print money to fill that capacity. 2011 is looking more optimistic, but this year is all about getting the central banks to press the button again.”

In terms of battling deflation, Marchese explained that there are conflicting views on what the correct policy should be.

“Personally, I think the inflationary problem—which doesn’t exist currently but may in the future—is far less [serious] than the deflationary problem,” he said, citing Japan as the precedent for this. “We can look to their economy and the policy mistakes that were made there years ago, and the question is, what are the leaders of the global central banks going to do? I think the market is waiting on a second stimulus package of significant size.”

Greetham illustrated the conflicting views on stimulus spending between the U.S. and Europe, and sees interesting asset allocation opportunities either in favour of one or the other. In his multi-asset funds, he’s currently underweight Euro zone equities.

“I think the Euro is going to weaken further, and I think it’s probably a mistake to tighten fiscal policy aggressively just when it feels like we’re at the point where the growth cycle is peaking.”

The Chinese connection
As the gravity-defying Chinese economy continues to hum (albeit at a lesser volume than earlier in the decade), China watchers wait with baited breath for the much ballyhooed “hard landing” many expect, said Marchese.

“It seems like every even-numbered year over the past 8 years we hear talk of a hard landing in China,” he said. “Their banks are raising their reserve ratios and they’re trying to cool speculation in the residential property market. The question is, is it more of a mid-cycle correction and prudent action or are they experiencing a hard landing?” Only time will tell, but indications suggest that it is more of a soft landing than a hard one.

And an interesting pattern was identified by Greetham, who believes the sentiment of the Chinese business community can telegraph economic swings roughly four months down the road.

“Chinese business confidence troughed immediately after the economic easing policy was announced in November of ’08, and the global stock markets troughed four months later, in March of 09,” he said. “The Chinese have been tightening lately and Chinese business confidence peaked in January of this year, and the markets peaked in April/May. So we’re all waiting to see the Chinese ease off, and that will be a great signal to start accumulating equities and commodities again.”

Greetham said the Chinese are looking for signs of dipping inflation, which he believes will happen in the next six months, resulting in more stimulus from Beijing.