China
Investors should de-risk tactically in expectation of shocks and surprises ahead of the US election and an uncertain aftermath. Democratic victory with a gridlocked Congress is our base case but would bring minor tax hikes and nuclear brinksmanship with Russia. A Republican single-party sweep offers huge tax cuts but also a global trade war. Recession looms regardless.
The US suffers from enough imbalances to produce a mild recession. Unfortunately, such a recession could lead to a significant bear market in stocks, just as it did during the very mild 2001 recession.
Both the Chinese and US central banks will likely take policy actions in the coming weeks. What is the potential impact of a mortgage rate cut on China’s household consumption and the broader economy? Will the anticipated Fed easing cycle further lift the RMB exchange rate versus the US dollar?
