Down, Down, Deeper and Down

As with many things perception is all over short time periods

Status Quo

Investing is difficult, not least because in moments like these when markets take a lurch down and the media is full of “the end is nigh” predictions it feels very uncomfortable to watch hard won gains disappear.

It’s certainly true to say that being up to the emotional challenge of retaining a calm perspective when others are losing theirs, is a key component of long term investing success.

So what’s going on?

There are a number of factors which have coalesced to spook markets:

  1. The approaching US rate hike
  2. The deteriorating growth rate of China
  3. The Chinese currency devaluation
  4. Falling Chinese stock market
  5. Oil prices falling to multi-year lows
  6. General commodity price weakness
  7. Sluggish earnings growth

Is it so terrible?

The short answer (apart from China and more on that in a minute) is no, not really.

The U.S. economy is chugging along quite well with decent GDP growth (between 2.5-3%) and strong employment numbers. Company profits are not stellar but ok in most cases and the market is a little above average in valuation, but that’s against a backdrop of zero interest rates (dividend yields are higher than the 10 year treasury rate on good companies).

The U.S. market has been flat since QE ended in the autumn of 2014, which is understandable as it had risen strongly previously.

THE UK market (FTSE 100) has a large constituency of Global Mining Stocks (Glencore, BHP Billiton, Rio Tinto and Anglo American). They have performed very poorly which has effected the overall FTSE returns.

Europe is doing ok, the Greek nonsense was unhelpful but companies are turning in decent performance and QE is here to stay which will assist asset prices.

So…China

Back in 2008/9 when the West was suffering a banking collapse all eyes turned longingly to the Middle Kingdom as the saviour for global growth and prosperity.

We were struggling with excessive corporate and personal debt, falling asset prices and falling consumption as a result.

China was racking up 10% plus per annum expansion rates, sucking in huge amounts of commodities (which boomed) and manufacturing at ever decreasing prices which fed through to lower Western inflation. Most alluringly it promised to create a billion new urban dwelling middle income consumers all of whom would be desperate to buy Western goods.

Fast forward to now and the picture is less rosy.

Its growth rate has fallen to 5% and those are official figures the veracity of which people are now openly questioning.

This slowing growth has significantly reduced demand for raw materials, and this was after the commodity sector had just completed a huge ramp up in production to accommodate what it thought was a ‘new normal’ demand level (so increase commodity supply / reduced demand; cue the commodity cycle peddling furiously back down the price hill).

The Chinese stock market has fallen 30% plus in the last month, that’s horrendous!

Well yes if you bought shares in June, but if you bought them at the beginning of this year the market is actually flat (no loss). If you bought shares this time last year you’re still up 20% plus.

So it really depends on how you tell it; short term = bad, mid to short term perfectly ok.

Conclusion

There will be endless discussion and opinion on why this or why that but if you step back from the noise and fury and look at the bigger picture:

The U.S. is doing well and a couple of quarter point rate rises taking the overall rate from almost zero to just above, is not really something to vex the economy unduly. Although it certainly is something for the hysterical investment crowd to get its knickers in a knot about but we know to ignore them most of the time.

China (and India) is going to grow strongly and become ever more powerful with enormous populations desiring Western goods, that’s undoubted.

But it will be bumpy, nothing like what China is now undertaking has ever been attempted before and it’s not realistic to expect it to be a smooth ride.

As with many things perception is all over short time periods, China was (only a few years ago) perceived as the panacea in the East, today it’s the opposite, the reality as is usually the case, sits somewhere in the middle.

NOTE: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.

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