Abu Dhabi, UAETuesday 23 July 2019

Concerns on China and Europe dampen global investors’ sentiment, IIF says

Long-term investors see China slowdown, euro zone destabilization, trade wars as key risks in 1H

Chinese workers wait for a public bus in Beijing. China's economy grew 6.4 per cent in the first quarter compared to the same period last year. EPA/ROMAN PILIPEY
Chinese workers wait for a public bus in Beijing. China's economy grew 6.4 per cent in the first quarter compared to the same period last year. EPA/ROMAN PILIPEY

An economic slowdown in China, destabilization in the euro zone and trade wars are the top risks facing the faltering global economy in the first half of the year, according to a survey of long-term investors.

Nearly three-quarters of investors surveyed said the current investment environment is less supportive compared to a year ago, according to findings from the Institute of International Finance (IIF).

"Concerns about trade conflicts and a potential growth slowdown in China have eased but remain high; political and economic trends in Europe to weigh on sentiment," the IIF said.

The H1 2019 IIF Long-Term Investor Survey was conducted among the IIF's institutional investor membership in March. The survey spanned 17 firms with $12 trillion under management. China's economy grew at a steady 6.4 per cent pace in the first quarter, showing welcome signs of stabilization, although not enough for global central bankers to declare the all clear about the outlook. The US and China are locked in tense negotiations aimed at ending their nine-month trade war, that has roiled markets and made investors jittery.

Investors view geopolitical risks and a slowdown in global growth as the most important macroeconomic risk factors affecting investment portfolios, the report said.

Other significant risks include global trade frictions and potential central bank policy mistakes, it said.

Investors surveyed expect that the US Fed's interest rate to reach 2.75 per cent in the current cycle before the Fed begins to cut rates. A majority of the participants expressed concern about a potential Fed or European Central Bank policy mistake over the next twelve months.

More than half of the participants said that policymakers still have some leeway to use monetary and fiscal policies to deal with the next global downturn. More than 95 per cent said they expect global policymakers to respond to the next economic slowdown with more monetary stimulus, while some 75 per cent of participants foresee further fiscal stimulus.

Earlier this month the International Monetary Fund revised for the third time in six months, its 2019 outlook for global growth, to the lowest since the financial crisis a decade ago, as conditions worsened in most major advanced economies. Growth could further slow down due to trade tensions and a potentially disorderly British exit from the European Union.

The global economy will likely grow 3.3 percent this year, according to the Washington-based lender. The forecast cut 0.2 percentage point from the IMF’s outlook in January. The projected growth rate for next year was unchanged at 3.6 percent.

The IIF said there is a renewed appetite for emerging market assets among long-term investors.

More than three-quarters of survey participants expect a "slight increase in allocations" to hard-currency emerging markets bonds over the next twelve months, the report showed.

Nearly 40 per cent expect higher exposure to emerging market stocks as well as increasing demand for local currency bonds.

More than half of the investors expect some decline in exposure to mature market stocks. Some anticipate a slight decline in exposure to mature market corporate bonds, citing credit quality concerns.

Investors said deteriorating credit quality, equity market volatility, and stretched asset valuations are the most important risk factors for investment portfolios over the next twelve months, according to the IIF.

A majority of participants do not foresee significant cyber or environmental risks over the next 12 months.

Updated: April 20, 2019 01:29 PM

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