China is slowing rapidly, so commodity prices will be relatively low for the next months.
However, the key question concerning China will be how quickly it’s slowing, and whether it will achieve a soft landing, says Benjamin Tal, managing director and deputy chief economist at CIBC World Markets.
“The TSX is a proxy for global economic growth,” he adds, and China has a major impact on trading results. “There’s a tight correlation between the Chinese economy and the performance of the TSX over the past six months.”
He says this will continue, and forecasts any positive signals coming out of China will boost the TSX. Though commodities will be on the defensive for the next few months, prices will improve over the long term.
“A hard landing could be devastating for the global economy because a soft landing is what’s been priced into the market,” says Tal. “I believe it’ll achieve a soft landing because the government has the fiscal might, monetary might and the political might to do so.”
He says China can change things quickly to aid the economy: interest rates are relatively high and can come down, and its fiscal situation is much better than those of the G7.
The leadership of the ruling Communist party has also changed, which happens only once every ten years.
The new leader, Xi Jinping, is a pragmatist. He’s aware if he doesn’t address the country’s high unemployment rate, there will likely be civil unrest.
Tal predicts he’ll push for growth and make a soft landing a priority.
“This isn’t an economy that will grow by 10% as in the past decade, but around 7%, which is still relatively healthy for China. This level of growth is equivalent to the Chinese economy rising by 9% a few years ago, since it’s now larger.”
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Over the next six months, he says investors will see positive trends emerge. Between now and then, there’ll be uncertainty in markets and commodity prices will struggle.