China a bigger risk to global economy than Brexit

A severe slowdown in China is a bigger danger for the global economy than the UK’s departure from the European Union, according to fixed income house BlueBay Asset Management. It stated: “The drama of Brexit has distracted investors from worries of a more severe slowdown in China’s growth as earlier policy easing is exhausted in addition to the CNY’s depreciation.”

BlueBay head of credit strategy, David Riley, said that a fall in China’s currency in August 2015 led to turbulence in global markets, culminating in a 10% correction in the S&P 500 index at the end of August. In contrast, when the UK voted for Brexit, it caused a 4% fall in the S&P 500 and falls in other risk assets, but this quickly reversed. Riley commented: “The relative out-performance of emerging market assets underscores that Brexit is essentially a local rather than global event.”

Riley added that it was striking that the recovery in risk assets was not matched by a reversal in the decline of core goverment bond yields. “In our view, this reflects investor expectations that risk-averse central banks fearful of global disinflation and fragile growth will deliver further policy relief,” Riley commented. He went to say that a widening gap between government bonds and risk assets often ends with a correction in one or the other. In this regard, Riley said a key lesson from last August is that any after-shocks can be severe.