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Global risks give traders pause
Australian Financial Review, Australia  by Mark Eggleton
21 Nov 2018
Special Report - Page 4 - 739 words - ID 1039629449 - Photo: Yes - Type: News Item - Size: 433.00cm2

The state of the global economy is the major reason why Australian investors' expectations on sharemarket returns have turned negative for the first time since the GFC, according to the most recent Investment Intentions Index released by Investment Trends.

Investment Trends research director Recep Ill Peker says Australian investors are more worried about how geopolitical tensions will affect local markets over the coming months and, in the October survey, they are particularly worried about what actions Donald Trump will take globally and particularly in the escalating trade war with China.

Unfortunately, that trade war looks set to enter a new phase - Nobel-prizewinning economist Joseph Stiglitz told The Australian Financial Review: "You don't realise there is a lot of stupidity in the world. It's just beginning to sink in that we are going to go to a trade war of a serious proportion."

It is already getting serious with Trump having already slapped tariffs on about $250 billion worth of Chinese imports and threatened to roughly double that amount unless the Chinese government indicates it will change its "abusive trade practices and stop stealing US intellectual property".

In a classic tit-for-tat move, the Chinese have hit back with billions of dollars of tariffs on US exports and have all but stopped buying farm goods from the United States as well.

The bad news for already nervous Australian investors is the trade war will probably escalate even with the Democratic Party winning back control of the House of Representatives in the US midterm elections.

While they want to act as a handbrake on Trump's wilder flights of fancy, they have indicated they will be in no hurry to force the Trump administration's hand on the China trade war.

In fact, numerous foreign policy commentators have said the Democratic Party's anti-China sentiment is presently, in many ways, as strong as the Republicans.

Peker also highlighted other investor concerns revolving around the state of the global economy, including a worry about rising debt levels and the present growth in the US economy.

"While the US is doing well, there are concerns about rising levels of inflation and bond yields coupled with record levels of debt," Peker says.

He also cited other concerns included Australia's slowing property market and one-fifth of respondents starting to suggest there is a bit of volatility fatigue setting in.

Peker says Investment Trends has not seen this level of volatility fatigue "since the GFC and another smaller spike in 2011".

Beyond the worries about the White House administration, tension between the world's major economies and global debt levels, 32 per cent of respondents cited a China slowdown as a major geopolitical issue.

This was backed up by the release of China's growth figures, which saw credit grow at its slowest pace on record in October and property sales also slumping. With US tariffs expected to hit more broadly in the first half of 2019, the Chinese economy is slated to slow even further. It is a reason why Beijing has hinted at more stimulus but this in itself is a double-edged sword.

China's economy is mired in debt the last massive stimulus package in 2008 acted as a constraint on another credit binge. According to Dr Hui Feng, senior research fellow at Griffith University's Asia Institute, Beijing realises it does not really have much space to roll out a large stimulus package.

"China International Capital Corporation [CICC] figures suggest the average mortgage repayment in tier-one cities such as Beijing and Shanghai is now more than average disposable income.

Furthermore, private sector debt remains high with a recent Bloomberg report highlighting levels of corporate bond distress are higher than all other emerging markets combined.

"Corporate bond defaults are on the increase right across China," Feng says.

China's central bank has acknowledged the worsening outlook but, according to Feng, with the RMB depreciating and the interest rate spread between the US and China widening, they know they have less scope to loosen monetary policy.

"What the monetary authority may do is target a stimulus package to particular sectors. This might involve more infrastructure projects in certain provinces and in tier-two or tier-three cities ... which are not as heavily leveraged as the larger cities," Feng says.

We are going to go to a trade war of a serious proportion.

Joseph Stiglitz, economist

Caption Text:
Recep Ill Peker says there is a high level of volatility fatigue among investors. PHOTO: LOUIE DOUVIS

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