Run For The Hills or just the Summertime Blues? An update on recent stockmarket falls.
Many were predicting that August would be a difficult month for investors and so it has proved; traditionally, the summer months witness low liquidity as senior managers of money are away on the beach, so market reactions tend to be exaggerated. But has something shifted in the investment ether to warrant a panic?
Recent stockmarket falls have been heavy; the FTSE 100 had a bad day today (19.08.15), down 1.9%; it has now lost 4.4% since the end of July and 2.5% for the year. The US S&P 500, in contrast, (2083 at the time of writing) is only down 1% since last month and is up 1.2% for the year, and with sterling more or less unchanged v. the dollar that gain has not been wiped out by currency loss.
The China Syndrome – again
The catalyst for the latest bout of stockmarket nerves seems to have been the Chinese authorities’ devaluation of the yuan last week. Acting on the extreme volatility seen previously in the Chinese stockmarket, this has exacerbated investor fears that the Chinese economy is slowing rapidly. In turn, this has hit already depressed commodity markets, hurt also today, according to Bloomberg, by comments from the Glencore CEO about aggressive selling of copper by Chinese hedge funds.
An extract from the Glencore report is perhaps worth repeating: ‘Commodity prices are now at levels not seen since the financial crisis of 2008/2009 and various markets appear increasingly driven by perceptions and technical factors rather than reality or fundamentals. Price correlation between the major commodities has returned to historically high levels, despite there being vast differences in supply, demand and inventory conditions.’
It is safe to say that fundamentals usually reassert themselves at some point.
Oil and trouble
The oil price has recently returned to a dramatic bear market with Brent crude down 20% in dollar terms since the end of June. Oil took another hit today on reports that US crude oil stockpiles were much higher than expected, although this was later put down largely to refinery issues. With the high weighting of the FTSE 100 to both commodity companies and the oil & gas majors, it is perhaps unsurprising that it has underperformed the US market.
Does a 1.9% fall in the value of the Chinese currency versus the US dollar, probably reflecting the underlying reality of a currency which had become overvalued, really justify all the negative reaction? Almost certainly not, but this is a stockmarket that has frayed nerves in any case, as investors worry about US interest rate rises.
It is instructive to look at a graph of the S&P today which had initially sold off quite rapidly, to be down 0.9% in sympathy with Asian and European markets and in slight trepidation of what the minutes of last month’s Federal Reserve meeting were about to reveal. In fact, the initial interpretation of these minutes, which emphasised the Fed’s view that inflation was still not trending up to a level commensurate with its objective, was doveish; meaning that US interest rates might not rise in September after all, and the S&P shot back up again. Rapidly, however, bearish sentiment took over and the market fell away.
The hangover lingers . . .
These absurd short term market movements need to be ignored. The hangover from the financial crisis continues to be painful and of course risks still abound; the main one, perhaps, that a deflationary mindset saps business and consumer confidence to such an extent that it proves self-fulfilling.
But lower commodity and oil prices are pretty good news for Western consumers and industry. In addition, if the US continues to generate 200,000 plus jobs a month, this should eventually feed through into higher wage growth and hence higher consumption (after domestic balance sheets have been repaired) which should in turn help to stimulate the global economy.
But the aspirin may work
It is hard to see in these circumstances the so-called emerging economies (many of which may have already emerged) not benefiting. These have the added attraction of the potential for middle class growth to drive forward domestic consumption significantly. For long term investors who can stomach volatility, whilst mindful of the potential impact of currency weakness on dividends, we think this is a good time to look at, for example, Murray International, Aberdeen Asian Income and JP Morgan Emerging Markets Income.