Zulauf Sees China Letting Yuan Value Fall: Barron's Roundtable

  • Currency devaluation more palatable than alternatives, he says
  • Gabelli intrigued by Madison Square Garden, Kinnevik, CBS

China will eventually stop intervening in currency markets to support the value of the yuan in order to avoid losing all of its foreign exchange reserves, Wall Street strategists told Barron’s.

With an annual capital account deficit estimated at $1 trillion, China could exhaust those reserves in little more than a year unless it allows a devaluation, according to strategists participating in Barron’s 2016 Roundtable panel discussion in the magazine’s Jan. 23 issue. A balance of payments crisis usually ends with a recession, the strategists said.

Felix Zulauf, founder and president of Zulauf Asset Management AG, told Barron’s that a Chinese recession could trigger a banking crisis in Singapore, which would eventually spread to Hong Kong. Investors should be defensive, although there are areas of safety, such as consumer staples and utilities, he said.

Given the potential for that kind of spillover in Singapore, an exchange-traded fund would let investors benefit from declining local stock prices and currency movements, Zulauf said. Similarly, in Europe, shorting Germany’s DAX and Euro Stoxx indexes should generate returns and provide buying opportunities in 2017, he said.

Madison Square Garden

Mario Gabelli, chairman and CEO of Gamco Investors, was excited about the prospects of Madison Square Garden Co. -- which owns the Manhattan arena bearing its name along with franchises including the New York Knicks basketball team -- because of possibilities that include real estate development. He also cited Sweden’s Investment AB Kinnevik and U.S. media group CBS Corp. as companies with potential for stock gains.

The Federal Reserve will be unable to raise interest rates as planned, said Jeffrey Gundlach, founder and chief executive officer of DoubleLine Capital, given the deterioration in stock prices and China growing more slowly than its government claims. The junk-bond market is likely to remain challenged and would require a large rally in commodity prices to avoid a debt-default cycle, he said.

Abby Joseph Cohen, president of Goldman Sachs Group Inc.’s Global Markets Institute, recommended Dutch technology group Royal Philips NV as a beneficiary of health-care capital spending because of the company’s medical business. She also likes Mylan NV, citing the likelihood of consolidation in the generic-drug industry.

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