Rothschild: China Will Be Tested by Corporate Defaults

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Rothschild Wealth Management is known for its focus on wealth preservation over high-risk deals that offer better growth, so it’s no surprise that it is cautiously optimistic even as it expects to see a continued global recovery this year.

“China has experienced its first corporate bond default and there are ongoing concerns about the pace of economic growth. Meanwhile, tensions between Ukraine and Russia have been depressing investor sentiment,” writes Rothschild chief investment officer Dirk Wiedmann in the fund’s April letter. “These events remind us about the dangers of complacency.”

Rothschild: China will be tested by corporate defaults

China’s first corporate default wasn’t really a surprise; everyone knew that the country will have to survive the fallout from years of loose credit as non-performing loans shake themselves out, but it means that we will finally have our answer about whether the Chinese government can bring the economy in for a smooth landing. On the other hand, the Rothschild letter is less concerned about the implications of falling copper prices. This is sometimes cited as evidence that the Chinese economy is weaker than advertised because China is the world’s largest buyer of copper. But gradually falling demand along with rising production has created a global surplus, which can also explain the lack of price support.

The fallout from Ukraine/Russia tensions are impossible to predict, but heavy sanctions or a politically motivated trade war could endanger Europe’s recovery, with consequences for the rest of the globe.

Rothschild: US equities stretched, but have Fed support

Even though Rothschild sees US equity valuations as ‘stretched’ the combination of low interest rates and high liquidity will continue to support markets this year. Of course the asset management company is aware that QE is on its way out, but that doesn’t mean accommodative monetary policy is anywhere near ending. When Federal Reserve chairperson Janet Yellen surprised markets with an offhand comment implying that interest rates could rise a year from now, she felt the need to walk those comments back a week late. It seems that the Yellen put may be just as good as the Bernanke put proved to be.

But eventually the Fed will have to let rates go back up, so Rothschild is staying away from long-maturity bonds that would take a hit with the return to normal monetary policy. Instead they are investing in shorter-maturity corporate bonds that have less interest rate risk and offer better yields than government bonds. Rothschild has also allocated a large portion of its holdings to hedge funds that can provide absolute returns uncorrelated to equity markets and to funds that protect against an unexpected equities bear market.

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