Damien Wood

Readers of recent financial media are regularly exposed to China Doomsters assuring us that a China economic crash is just around the corner. We agree that the Chinese economy has too much debt that was built up too quickly. This has promoted excess capacity in its economy causing large levels of (unreported) bad debts at banks. Does that mean an imminent crash for our largest trading partner? Spectrum does not think so. Our base case is for China to have a prolonged period of far slower growth. The government has the political will, tools and ability to avoid a banking crash- induced recession. Spectrum believes that the A$ will absorb much of the pain from a lower than expected level of exports. Interest rates will remain near or lower than current levels. Bond default risk will increase moderately but credit spreads will be supported by investors chasing returns in a low yield environment. The bottom line - A$ corporate bonds should continue to be a solid investment for domestic investors delivering better returns than deposits over the coming year.


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