Felix Zulauf, president of Zulauf Asset Management and co-chief investment officer and partner at Vicenda Asset Management, says problems in China will continue to put pressure on the markets and he predicts most global markets will trade below their most recent lows. Zulauf thinks the S&P 500 will likely fall to 1800 and recommends that investors stick with stocks that are not economically sensitive and that have solid balance sheets. He also recommends staying away from emerging markets.

Zulauf’s negative market outlook is mostly driven by his view on China, which he says has a “balance-of-payments problem”. According to Zulauf,  “China has experienced capital outflows for the past 12 months on the order of $500 billion or more. The country doesn’t have a completely open capital account, so you need to get the government’s permission to move money abroad … Under free-market circumstances, capital outflows would depress the value of the currency. But China was running down its foreign-exchange reserves to support its currency. The government concluded that a currency regime change was needed to prevent the loss of further foreign-exchange reserves.” Historically, most countries with a balance-of-payments problem see their currencies decline and if China’s currency begins a large decline relative to the US dollar, it will make products made in China cheaper. As a result of this, those companies that compete with China will be forced to cut prices. And as those prices fall, profits of those companies will also fall and jobs will be eliminated as firms try to remain competitive with Chinese firms.