During the spring of 2015 major equity market indices such as the S&P500 and the FTSE100 made record highs and most equity investors had a reasonable start to the year. However over the course of the summer, especially since August, these same indices along with share valuations have tumbled sharply. Widely discussed by politicians, economists and pundits is how it will effect or portray the true state of the economy now and in the coming months.
The falls initially brought the markets in to official correction territory of 10% from their peaks with the S&P500 down over 10.5% and the FTSE100 over 15% from its April highs. These rapid declines it’s been argued were to be expected after such a long run bull market since the last lows in 2011.
The causes often cited include slowing economic growth in China, the inevitable cycle of raising of interest rates in the developed world, especially in the US and UK.
This is countered balanced with Eurozone quantitative easing and steady US economic optimism combined with low commodity prices, especially for oil, iron ore and copper, causing lower profits for producers and traders alike such as mining/trading house Glencore. This keeps input costs low for manufacturers and inflation benign even raising concerns about deflationary risks to the world economy.
QE in Europe, although meant to boost economic growth, is still a sign of weak Eurozone demand yet its effect can boost stock markets (unless some other worry appears on the horizon). The growth and confidence in the US economy should also provide support for markets yet many fret over how far interest rate rises will rise, and its effect on emerging markets and their dollar leveraged economies. Others want rising rates to stay ahead of the effects of an improving US economy.
It can be a confusing picture and one which brings with it increasing trading volatility although not the levels seen during the financial crisis of 2007-9. Indeed, many commentators highlighted that computer controlled quantitative trading programmes execute millions of trades at super high speed in the opening moments of daily trading causing stocks, for example like General Electric did by falling 10% or more before recovering later in the trading day.
Interest rates have been held by the Federal Reserve in September. The debate when exactly and the reasons for and against raising rates continue and thus market volatility. Good for some (good) traders but difficult for most investors.
So what to do-is China headed for a hard landing? Growth is down from 8-10% long run growth to a government insisted 7%, perhaps it much less 5% or even 3.5%-who really would know for sure in the West? China is shifting to a more consumer-led economy with a desire for increasing military and economic presence from the manufacturing, property and infrastructure growth phase of the last 35 years.
With a $10 trillion dollar GDP, the Chinese are in a position to certainly try and that’s a bigger story than a sharp correction in a super charged Chinese A-shares on the Shanghai stock exchange. For the patient minded, the long term trend for Asian economic growth, barring catastrophe, remains.
How China conducts its foreign and military policies over international issues like the nine-dash line territorial dispute in the South China Sea or the spat with Japan in the East China Sea over disputed islands and reefs with gas fields are political stories which investors may wish to monitor.
Notably, whether with China slowing and weak demand in Europe, or an improving US economy needing rising rates or not (yet) buying well performing companies with decent prospects for 5 years or more is my preferred investment strategy. I think looking daily or even weekly at fluctuations in valuations is more for traders than long only investors. It can make you more nervous than need be and cause over trading.
Traders have different strategies and targets than long only investors and the two are best not confused. In my opinion it depends on what every investor is trying to achieve for themselves (or their clients).
El-Erian, the ex-investment chief of PIMCO now a Bloomberg commentator, takes a view that world growth is slowing, except for India, that central bank policy responses are now less effective in the developed world. The Fed, BoE or the ECB’s fiscal tools of low rates and QE having marginally diminishing effects the more often they are deployed.
Markets do reprice themselves as rates begin to rise or demand remains weak and often they overshoot in either direction up or down giving an opportunity for investors to sell or buy stocks or other assets to suit their own investment strategies. El-Erian added that this is not 1998 or even 2008. A sentiment I agree with, thus I have added to a variety of existing holdings in my own pension and savings schemes.
Will the market go up from here or is the worst yet to come? Who knows but that is what monitoring events is all about. I think that is the larger part of being a private investor.
Finally, as China migrates to a consumer economy. Migrants from war ravaged Syria and North African countries such as Libya and Sudan are making treacherous journeys in boats and by foot to seek a better life in Europe. Who can blame them?
It’s shocking and upsetting watching their odyssey on the news especially involving young children. Germany has taken a political lead in accepting refugees. How a long term solution is achieved for these blighting wars is the obvious question with no easy answer for these ravaged countries but one must be found somehow.
The EU now needs to work on a co-ordinated refugee policy rather than just esoteric solutions to debt instruments in Greece. Ironically financially stricken Greece happens to be for many fleeing Syrians their first port of call on their journey to a better life.
Any EU wide-policy would make a change of mission in its identity as an economic union and for an EU looking more nationalistic in its political hue, a difficult yet necessary development as this crisis is the worst since WW2. How many and whether to offer permanent or long term temporary asylum will be much debated.
This, in my opinion, on how the EU overcomes nationalistic centrifugal forces to become, not more integrated, but more responsive and co-ordinated to both economic and social policy crises, is another story which investors may wish to monitor closely.
However, varied and unpredictable the outcomes may be migrants who remain and those eventually repatriated once peace is found will drive economies just like migrations always have in the past from ancient times until now.
I will return to infrastructure and UK housing in the next blog.
LDC