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Legg Mason Brandywine: China needs to stimulate its economy

Although the world seems to be recovering from the 2008 financial crisis, many countries besides U.S. are struggling to stimulate their economies. China, who faces downturns in their economy, is in need of stimulus.

Regina Borromeo, a portfolio manager of Brandywine Global Investment Management stated that China will lower its interest rate and U.S. will gradually raise its interest rate, which should limit its negative effects on the emerging markets. China suffers from economic downturns since the end of 2014, with deflation in property values and producer prices, the country requires stimulus.

The Central Bank of China will have to lower its interest rate and increase its government expenditure to stimulate the economy. At the moment, its finance cost is neutral to growth rate (GDP), yet to stimulate the economy, the financial cost should be lower than its GDP. Therefore, Borromeo believes there are lots of rooms for cutting rates in China.

For the U.S., it’s a different story. As U.S. growth continues, there is a gradual increase in wage and employment rates. It is predicted the Federal Reserve System (FED) will increase the interest rate later this year.

As for the European countries, it is believed that they will deal a short term solution with Greece but the long term sustainability of the debt calls for a close observation. Borromeo suggested that the EU will focus on expanding its balance sheets to stimulate the economy.

At the moment, the housing prices have stabilized in various EU countries, which means consumer spending and confidence amplifies as the net worth of citizens’ properties increases. However, since 90% of the enterprises in Europe are small and medium enterprises, more reduction in business borrowing costs will benefit the economy. Therefore, flexible interest rates will help with the economic performances and stabilize high yielding rates.

As for the emerging markets, Mexico is doing quite well and it should benefit from stronger U.S. growth since 80% of its trade ties to U.S. As for other emerging markets, there are risks and opportunities.

Recently, it is trickier to invest in commodity for risks lie within energy and oil dependent sovereigns. Many corporations in the emerging markets are exposed to commodity; therefore, the investors should diversify their investment and be more careful when investing in the emerging markets.

Borromeo advised the investors to diversify their investments and look for industries that are less associated with energy and commodities (food or mobile companies, etc) when investing in emerging markets lately.

Updated : 2021-09-27 11:33 GMT+08:00