Hong Kong macro hedge fund manager Geoffrey Barker of Ballingal Investment Advisors is a cautious economist. His analysis gives lots of reasons not to be too optimistic and he tells AsianInvestor why he thinks the world should not be viewed through rose-tinted spectacles.
He details the heavy lifting that China did on supply-side reform a decade ago, such as reform of state-owned enterprises, entry into the World Trade Organisation, housing reforms, market opening up and attracting foreign direct investment. But he feels that China has been riding that ever since. He thinks the current administration has been timid and behind the curve on economic reform, capital market reform and interest rate liberalisation.
“The problem is the bill will come due,” he says The stimulus enacted in response to the credit crunch has been misdirected and the growth versus inflation trade-off has been shifting for several years and will continue to do so as the supply of cheap labour grows more slowly.
"The country has to grow more slowly or have higher inflation. So while current leadership would like to keep things floating along and hand over smoothly, they have to choose whether to take lower growth or higher inflation. That’s not a choice for 2012, it’s a choice for today.
“I expect China to make timid half-steps, with core inflation creeping as the economy grows too fast. Then the biting point gets reached later this year and there’s less growth. It’s going to be a challenging year for China in 2011, and I’d hate to be the leader of the country.
"They didn’t let go of the reins when, a couple of years ago, they could have introduced liberalising reforms over interest rates and lending rates, developed the capital markets and let the currency move. People have too rosy a view of China.”
Managing a macro fund means he formulates a view on a very wide spectrum of markets. In 2010, his fund finished in the middle of the pack for macro managers, rising 6% in the first half of the year, but giving most back in the second half. On the subject of Europe he thinks the storms are not over yet.
"In Europe I think there is an over-focus on government debt and an under-focus on private sector debt and an incorrect view that if you can get fiscal transfers agreed in Europe then you can solve the problem.
"Actually fiscal transfers will perpetuate the European problem, because these countries need to re-adjust, they need to regain competitiveness. Fiscal transfers will just mean their uncompetitive status persists, though it does buy them some time, so perhaps we will see them, but I don’t think we’re yet at that pain threshold.
“Europe’s outcome depends on global recovery. The global cycle is important for the euro and if global recovery continues this year, then the day of reckoning is pushed out further – to March 2011.”