You have just returned from a relaxing summer holiday sunbathing in Portugal, or sailing in the Med or maybe a more adventurous one discovering California’s natural beauty. However, markets don’t seem to agree with your current state of mind…and just a glance at WEI Bloomberg screen or recent NAV moves quickly brings you back to a much less relaxed state.
Newspaper headlines are no more cheerful: China Shares Wipe Out All Gains This Year (WSJ), European bourses join global sell off (FT) and the Daily Telegraph’s Black Monday, as the FTSE 100 headed below 6000 within minutes of the opening bell.
So what has really been happening and what has been driving recent market movements?
The emphasis in markets has sharply reversed from a Western recovery/US policy story to a China growth risk/need for more effective policy action story (with the falling oil price bolstering demand for more policy action – why wouldn’t central bankers be doing more with no sign of inflation?).
There seems to be a growing lack of confidence in policymakers to counteract Asian/emerging market growth risks; in an environment where investors remain keenly focused on policy globally, this is weighing heavily on sentiment. Although there are genuine fundamental risks in China, it is not exactly a ‘sudden growth shock’ that has triggered most recent declines – there has been evidence of a Chinese slowdown since the beginning of the year. But the People’s Bank of China’s sudden devaluation of the Yuan earlier this month surprised markets and grabbed attention. These devaluations have been limited (3% USD vs YUAN), but combined with further weak data (China manufacturing PMI reaching 47.1) and the unwillingness of Chinese policy makers to reduce the Reserve Requirement Ratio (‘RRR’), they have sparked concern among investors.
We often comment that markets do not necessarily respond to developments in the most logical timeframe. There are always a great number of factors occurring across the global economy at any time that investors could choose to focus on. Often, when investors are feeling negative, they will focus on the factors that reinforce that view – and vice-versa. So much of the complexity of markets becomes distilled into a single story, enabling these sudden swings in sentiment to escalate. In this instance, as often during such episodes, there does seem to be a fair bit of price-driving-price around the China issue in recent weeks. This means that although we cannot say China’s issues are just ‘noise’, there has more recently been a lot of noise around the topic, reflected in headlines focusing on fairly meaningless things like indices falling through certain levels.
So it feels that we are entering ‘episodic’ territory, where opportunities may be presented. Yes, there are genuine concerns in terms of Asian growth which could trigger lower demand and fundamentals may deteriorate in some respects. Markets have obviously sharply priced in a change in sentiment while China has been dominating headlines, but we cannot know whether all risks are yet fully priced in. However, some assets further away have also just got a lot cheaper rather quickly and it may make sense to sniff opportunities in markets that have sold off, but where fundamentals are still looking pretty strong.