The global markets witnessed major crash in August following the China's economy slow down, Yuan devaluation, discouraging manufacturing numbers, etc, Now, the markets are recovering. But, economists, fund managers caution that the party is not over. China may slip in recession in next quarter or six quarters later.
At a time when everyone is taking a sigh of relief that at least China is growing at 6-7 percent if not slowing down significantly, an alert coming from an economist will definitely become a worry some factor for the world economy. With stocks markets recovering from their lows, Tom Forester, a fund manager, warns that Chinese factor is not yet over, but the real problem is just beginning. According to Forester, next quarter or six quarters later, China is bound to get into a recession. After the shocks of August, the global markets are just feeling relaxed over the possible growth in China with support from stimulus plans is set to take off. The fund manager's alert says the party is not over. Economists also forecast that growth rate may fall below seven percent in the third quarter.
The world's second largest economy China is the main consumer of commodities, consumer goods, energy and so on. If China slips into recession, it'll be a major blow to the US investors and other major economies. It'll impact investors, those who don't have direct exposure to Chinese markets also.
Tom Forester helped his fund beat August crash. Dow Jones index fell 1,000 points on August 24 and it suffered over 10 percent loss during the latest market crash following the Chinese currency Yuan devaluation, discouraging numbers from manufacturing industry, etc. During the same period, Forester fund rose 2.6 percent as against the 10.2 percent loss of S&P 500 index.
Despite Chinese government's revival packages, the economic slump is continuing, observe economists, who further predict that economic growth rate may fall further to its lowest since the global financial crisis in 2008.
The China's economy growth rate may drop lower than seven percent in the next third quarter ending September. If this happens so, then it'll be for the first time since 2008 financial crisis. The fixed-asset investment growth eased to 11 percent during January to August. This was the slowest pace since 2000. The manufacturing industry's growth rate is at 6.1 percent disappointing everyone.
Economists further hold views on China's economy that 6.1 percent factory output was below the forecast of 6.4 percent. The drop in car sales and lower imports and low rate of inflation are indicating new signs of recession or economy is losing steam. China has witnessed cut in interest rates five times since November. Chinese government lowered interest rates with an objective of boosting economy growth rate.
China has recently revised down growth projections for 2014 from 7.4 percent to 7.3 percent. This is its weakest in the past 25 years. Now, the Chinese government is targeting seven percent growth rate for 2015. The Chinese government is also considering a proposal of offloading government some holding in public sector companies to private investors. This is aimed at moving towards a more market-based economy system.
As part of the 2008 strategy, Forester increased cash reserves and took puts on the SPY and kept hedge funds the iShares S&P500 ETF to offset the equity exposure. Now, the fund is 70 percent long stocks, 30 percent in cash.
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