Major risks lurk in world’s largest markets, says GLG’s Funnell

Major risks lurk in America, Europe and China, despite the ongoing recovery, according to Ben Funnell, a co-lead long-only portfolio manager at GLG Partners.

Funnell says America must tackle its deficit or risk severe problems in the treasury markets, which could cause global contagion if left unaddressed.

America’s credit default swap spreads, or the cost of insuring the country against default, are now meaningless, according to the manager.

According to Funnell, two other risks could cause significant global contagion.

The second is the possibility of a senior debt restructuring in a major eurozone country. The third is a war between North and South Korea.

South Korea has issued its highest military alert short of declaring war after North Korea shelled one of its islands. (article continues below)

In China, Funnell is predicting a correction in the Shanghai A-share market due to inflation and harsher monetary policy.

However, he says these issues are highly unlikely to derail the Chinese economy.

Funnell says China’s powerful National Development and Reform Commission (NDRC) has until recently resisted calls to tighten policy, on the grounds it could drag on growth.

But the People’s Bank of China has now convinced the commission that inflation presents a serious problem and immediate policy tightening is required.

According to Funnell, there is evidence investors have been stockpiling physical commodities as they find ways to use the excessive amount of money in the economy.

In combination with China’s 20% wage inflation, Funnell says commodity stockpiling is driving up the price of basic goods.

As a result, the authorities will raise the amount of money banks must hold in reserve. Banks are not typically holding more reserves than required, Funnell says.

These measures mean less money will be available to lend, esepecially as three of the major banks are already lending out 75% of their deposits, the maximum permitted.

Funnell says GLG has cut back its positions in Chinese banks, but has turned more positive on the Hong Kong markets as money flows in from mainland China.

The major risks Funnell mentions are already causing uncertainty in equity markets. According to GLG’s analysis, investors are no longer rewarding unexpectedly positive earnings figures, as fears grow over their sustainability.