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The global economy will be worse than people think: portfolio manager

Despite the occasional rebound, it’s still a tough start to the year for stocks. And there might be a few reasons why the slide will resume.

The S&P 500 (^GSPC) rallied on Tuesday, but it remains down for the year, with weaker oil and worries about China among the reasons being blamed for the downturn.

But those two factors hint to increasing pessimism about global growth. A week ago, the IMF reduced its global growth forecast for 2016 to 3.4% from 3.6%.

Some believe those estimates are too optimistic.

“Global growth is going to continue to decelerate on the back of the emerging market slowdown,” said Chad Morganlander, portfolio manager at Stifel Nicolaus’ Washington Crossing Advisors. “I would not be surprised to see 2.5% global growth.”

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He doesn’t see this as just a cyclical downturn. Instead, Morganlander sees this as a structural shift in the world’s economy as emerging markets decelerate the debt that helped fuel their earlier growth.

That could put a damper on commodity demand. And global profits could also suffer.

“Earnings growth is not going to be as robust as everyone's expecting,” warns Morganlander. “We're going to be in a low return environment not only here in the United States but also in the developed markets and, in particular, in the emerging markets.”

To protect against a slowdown, Morganlander recommends investors shift to a defensive position and away from too much exposure to market risk.

“We've been very bearish on the market or, I should say, more pragmatic about the market, advising our clients as well as structuring our portfolios to move up the quality spectrum, move away from the high-beta, highly volatile stocks to more low volatility companies,” he said. “Look at consumer staple companies, utilities. Have some bonds in your portfolio and be underweight equities at this juncture. We still believe that there's going to continuation of volatility over the next several months.”

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