Global growth could slip below 3% if trade tensions escalate further: Jonathan Garner
Jonathan Garner, Chief of Asia and Emerging Market Equity Strategist at Morgan Stanley, shared his views on global markets as well as trade war concerns between the US and China in an interview with CNBC-TV18.
“We think that we are now mapping out the path towards Fed rate cuts in the second half. As that happens, we think the dollar will enter a period of decline and for India one of the many reasons that we are bullish India is we think that the rupee can be supported by a weaker dollar and also by a lower trajectory for the oil price than we thought previously and so even though the Reserve Bank of India (RBI) is beginning rate cutting environment, the Indian rupee can remain relatively stable. So this is very different from the environment last summer where you are having to hike rates here in India into an aggressive Fed and a strong dollar environment and a strong dollar environment. It is a much more bullish environment for Indian risk assets,” Garner said on Tuesday.
On rate cuts by the US Fed, Garner said, “The Fed is moving in that direction because of the way that financial markets have moved. They are not likely to move as aggressively and quickly as they did in January when the credit market became dislocated in the US so we have that huge spread widening in December. So we think it is unlikely we will see it in June-July, it is more the September timeframe.”
On the global growth front, Garner said, “We cut our view on emerging markets in May from overweight to neutral. We also cut our stance on China quite considerably again from overweight to neutral and one of the reasons we did that is our economists were beginning to highlight downside risks and they had a fairly muted path for global growth in any case whereas we thought that global growth, which fell a lot backend of last year would stabilise and maybe even will recover slightly in the second half of this year, we have now removed that scenario. If the trade tensions escalate further, we would be looking at global growth slipping below 3 percent. That environment where global growth slips below 3 percent would be very bearish for emerging markets particularly for more trade sensitive markets of North Asia. It is less of an issue for India or in fact for Brazil which is another one of our key overweights but it is a big problem for Korea, Taiwan and China.”
With regards to trade war concerns, Garner said, “In terms of the specifics of trade tensions between the US and China which is the most important part of it – there are many other complexities, for example, the Mexican situation and autos tariffs on Japan-Europe but specific to US-China we will find a lot more at the end of this month at G-20. We are not sure yet whether that will be a substantive meeting between Donald Trump and Xi Jinping or whether it will just be more of a handshake rather than something substantive. Our base case is essentially moving towards the view that these trade tensions will not be resolved near-term at that event, they will move over the next three-four months hopefully with some positive developments – not just on tariff issues but the non-tariff issues which are becoming more significant between the two countries. With market themselves acting as a circuit-breaker i.e. the market weakness that we have been seeing coming into play that will actually force these two back together and then some kind of a minimal agreement will be reached.”