"In China, financial stability is a national security topic," says Chief Investment Officer Yves Bonzon. Therefore, he is not overly worried about a financial meltdown. However, the country has to tackle its structural problems.

Following the market correction in October, Yves Bonzon, Julius Baer's Chief Investment Officer, decided to increase the equity exposure. What was the rationale behind it?
We did not expect such as sharp sell-off even in late September . Credit markets were tightening. Emerging currencies were improving after the strong sell-off in the first part of the year. The growth outlook still seemed reasonably good. Rates were moving up in an orderly manner. So the sell-off took us by surprise.

We had marginally positioned for that by strengthening the defensive side of the portfolio and marginally reducing our equity exposure in July. We were therefore in a position to take some risk. And we considered by the end of October that in those markets leading the correction this year, Europe in particular, we had reached a point at which valuations were cheap enough and the oversold condition deep enough to warrant some extra risk-taking.

In light of the upcoming G20 summit in Buenos Aires, there seems to be hope that President Trump and President Xi Jinping will reach some sort of trade deal. How realistic is that and how important would it be for markets?
Tackling the China issue is probably the only topic in Washington on which there is bipartisan consensus. Both Democrats and Republicans agree that China, since joining the WTO, has taken unfair advantage of its developing nation status and, in particular, has not been respectful of intellectual property.

We don’t expect the tensions between Beijing and Washington to completely abate. There might be some agreement specifically on trade, but this matter will continue to move forward next year. More importantly, markets have to a large extent priced this in, and I don’t think they expect clear visibility on the topic by the time the G20 meeting closes.

Speaking of China, its leading economic indicators have deteriorated lately. Is that a worry?
We are not so worried about China cyclically speaking. In China, financial stability is a national security topic, so there is hardly any chance that they will let markets melt down and a financial crisis happen. They have sufficient leeway to manage the cycle.

We are more concerned structurally speaking – is the leadership in Beijing leaning towards further reforms of the economy, more free market-driven policies, more support for private entrepreneurship as opposed to more state planning and a centrally controlled state-enterprise-type of capitalism? There’s no clarity in that area at present. And yet it is important for us because we made a strategic choice to concentrate on China for emerging equity allocation on the assumption that its leaders were aiming at further reforming and opening their markets. So this is the main area to watch.


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