Investors are over-estimating the impact of Brexit instead of looking further east to China, according to Tilney’s chief investment officer Gareth Lewis
Lewis has warned that too much focus on the EU referendum could see other investment themes that could potentially have a greater impact.
He said that 2016 has so far been “a rollercoaster ride for investors” beginning with a sharp decline in the Chinese stock market, worries about the health of the European banking sector and ending the first half in the UK voting to leave the EU.
Speaking at an investment seminar attended by International Investment, in London, Gareth Lewis, chief investment officer at Tilney Investment Management, said that he believes that China is one of the most important themes that will influence investment markets for the remainder of 2016 and are driving Tilney’s investment strategy.
“The Chinese authorities response to the Western banking crisis has been an explosion of debt funded internal investment which has been the fastest case of debt accumulation in history, both the magnitude and speed of this investment suggests misallocation,” said Lewis. “While a Chinese hard landing is by no means guaranteed, the risks are growing.
“We expect further stimulus measures to put off the day of reckoning – interest rate cuts, extending the local Government debt refinancing, state intervention in both property and stock markets.
‘Further currency devaluation’
“But the most obvious response will be a further currency devaluation, as regaining manufacturing competitiveness through devaluation buys time while other reforms are initiated. China’s share of world exports is at a record level while world trade is declining there is nowhere for their exports to go, swamping the globe with excess inventory could trigger deflation and fan the flames of protectionism,” he said.
Looking at the Brexit situation, Lewis believes that it is part of a much wider disaffection with political elites and it was “naïve to assume the current policy orthodoxy” will go unchallenged.
“The initial policy response following Brexit has focused on the possibility of further easing of monetary policy: lower rates and more QE, despite scant evidence this will boost genuine economic activity,” he said. “The irony is the system continues to provide artificial support to asset prices as a default response. This is one of the key causes of the problem – bailing out asset owners perpetuates inequality.
‘Reset’ of fiscal policy
“We still expect the debate to shift towards fiscal measures as politics takes centre stage, not least in the UK when Brexit has opened up the possibility of a “reset” of fiscal policy and the new Government has already dropped the previous Chancellor’s timeline for eliminating the UK deficit.”
Elsewhere he adds that the Eurozone and Japan have already reached the natural limits of monetary policy orthodoxy and that “helicopter money in all its many guises” is now a real possibility across much of the developed world. “But will not be enough to offset the grinding deflation driven by China,” added Lewis. “Banking deregulation and Fed monetary policy have driven a 15 year liquidity glut, with the resulting capital misallocation (TMT, US housing, China) creating increasingly frequent bout of capital market instability.
“China shows the greatest scope for economic traction as its Government resists reform and increases fiscal stimulus and internal investment,” he said. “However the first half recovery will come at a heavy price further down the line, as we expect the Yuan devaluation to continue driving global deflation.
“Brexit must be viewed as a short term economic negative of sufficient magnitude to change monetary policy and an opportunity to reset fiscal policy, but it is by no means the primary risk facing investors.”