Irrigation without flooding

China and other emerging market economies are taking major steps to avoid an economic slowdown, while taking care not to overreact.

01 Nov 2019

Key takeaways

  • China is targeting specific industries for stimulus, while avoiding risky sectors
  • Existing deficits and political risk may hamper emerging market growth
  • Expected performance encourages a shift in global assets from equities to fixed income

There are complex forces at work in the global investment markets today. Listen to the recent Top of the Morning podcast episode, “Irrigation without flooding,” on Apple Podcasts.

Slow economic growth in China

“China’s economic growth remains lackluster as delicate global trade conditions weigh on the Asian giant’s externally oriented sectors,” said Alejo Czerwonko, Emerging Markets Strategist-Americas from the UBS Chief Investment Office.

In response, Chinese officials have adopted an “irrigation without flooding” approach, which is intended to ward off a recession. Czerwonko believes, however, that these measures will “arrest the slowdown rather than lead to a sizable rebound.”

Limited options for stimulus

Political uncertainty is expected to stunt growth and stifle inflation, which has made central banks hesitant to add to existing deficits.

“Central bankers in the developed world have become more accommodative,” Czerwonko admits. But “the amount of water in their reservoirs is limited.”

With little room to lower interest rates and no appetite to increase government spending, options for stimulus are limited.

Adjusting your ideal global portfolio

Given the current climate, Czerwonko believes “carry” assets are likely to surpass “growth” assets—a prediction that impacts global portfolio strategy.

“We therefore underweight equities in global portfolios and see opportunities to earn yield in select sovereign and corporate fixed income segments,” Czerwonko explains.

For example, USD-denominated sovereign bonds currently offer an opportunity over emerging market equities.

If you are heavily weighted one way or another, it’s a good time to reassess and make sure you’re comfortable with your global portfolio.

New technologies and ESG trends

Major changes to technology paired with growing investor demand for strong environmental, social and governance (ESG) policies are making a noteworthy impact in global commodity markets.

Read the recent UBS report, “The Commodity Crunch Point,” which analyzes the outlook for commodity markets.


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