Moreover, much of China's external debt, a lot of which is held by European banks, is dollar-denominated. As we noted above, if China weakens its currency to stimulate exports, the cost of servicing the debt goes up. (What a turn of events! It wasn’t that long ago that everyone wondered what would happen if China stopped buying our debt. Could the shoe be on the other foot?) If China is not going to be a locomotive to power global growth, concerns about what will generate a strong and sustainable recovery in the near term are justified.
From an investment perspective, economic growth is likely to remain sluggish, and the deflationary consequences of the global overhang of debt will continue to weigh on prices. In such a sluggish environment, only the strongest companies are likely to meet growth expectations. For investors, this means that simply continuing to plow new money into index funds and their exchange-traded fund cousins may not be the solution it has been over the last several years. The need (and the opportunity) to differentiate between “winners” and “losers” could well make active investors the more attractive solution, particularly on a risk-adjusted basis.
Ralph Segall, CFA, CIC is Co-Founder and Chief Investment Officer of Segall Bryant & Hamill as well as Senior Portfolio Manager. Segall Bryant & Hamill has approx. $10AUM in domestic, international and emerging market strategies.
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