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MACROECONOMICS


FX


We anticipate that the credit impulse will move to a positive reading later this year, supporting Chinese risk assets and more broadly the Asian region. Although just as interesting is the likely knock on effect in European markets.


Figure 1: Bloomberg China Credit Impulse


growth when the macro backdrop was getting a little frothy.


Tis can be seen quite clearly in the chart above – the authorities provided support to the system during 2012 before tightening and then did so again in 2015/2016 before gradual tightening access to credit during the 2017 and 2018 period.


As we move through 2019 the China authorities are once again beginning to support the economy – how quickly we get back above the baseline level (net positive credit impulse) and the role of other tools (such as the recently announced tax cuts) will be the key driver of both the Chinese economy and more broadly global growth.


In the week that Mario Draghi (soon to be retired Head of the European Central Bank) was forced to downgrade both growth and inflation expectations for the Eurozone, could it be that just as the ECB downgrade their forecasts, it is time to turn more bullish on the Eurozone?


Over 10% of German exports are dependent on China and the broader emerging Asia market – an improvement in China will have a positive impact on the Eurozone and more particularly Germany. As you can see in the chart below the stimulus from China has a positive effect on German exports, normally with a 6-12 month lag.


So, to bring it back to our investment outlook – what does the above suggests to us?


We believe both Chinese and German equities (having done very poorly in 2018) look like a suitable place to deploy some of our risk capital - while the above theme is in its early stage – the market may move quite quickly to price in a more positive backdrop. As such having an allocation to the idea seems justifiable.


Ciaran Mulhall Figure 2: Bloomberg China Credit Impulse vs German Exports YoY % Investment Bulletin RJMG Wealth Management FX TRADER MAGAZINE April - June 2019 51


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