Investment View July/August 2015
So far it has been a disappointing and unsettled summer across markets reflecting the dreary weather that many of us throughout the UK have endured. Global equity markets have declined over the month and indeed the quarter, as investors continue to balance the prospects for economic growth and corporate progress against the risks of disappointment or disruption. Bond markets fretted about interest rate rises and were noticeably weaker towards the end of the month, in the face of a potential Greek exit from the euro.
Something of a solution has been negotiated with Greece but it seems to have produced a punishingly austere outcome, indeed even more austere than originally tabled, which doesn’t appear to address or resolve the fundamental issues. The whole performance was quite baffling and perhaps one day the economic historians can make sense of it all. After five years of Greek debt reshuffling, the most significant long-term impact may turn out to be that this was the moment the euro’s edifice started to crumble.
Perhaps, in time, the trials and tribulations of Greece will come to be seen either as a catalyst for stronger ties within the Eurozone or as the first nail in the currency’s coffin. Certainly, it does have the feel of a Pyrrhic victory for the Greek nation. Time will tell but we don’t believe the problem has truly gone away, though it was not Greece but the ramifications of its possible failure that were the significant concern. For the moment investors have moved their focus to the woes of the Chinese market, which has taken a pounding over the last few weeks.
China's stockmarket has been hit by significant volatility. The bull market accelerated at a ridiculous rate over a short period- increasing by around 150% as the chart shows. The bull market looks like it has come to an end. China's stockmarket has now fallen around 20%, and is considered to be in bear market territory. Local retail investors were encouraged to invest in the stockmarket by the Chinese government which had been trying to shift the focus from property. Retail investors were encouraged to invest in equities, which were viewed as cheap amidst concerns that property was creating a bubble and avoid a credit crisis. Chinese valuations are now looking expensive, around four times pricier than the US market. China’s benchmark index rallied from the low it hit in early July, when the government intervened following a collapse of more than 30 per cent in less than a month. The unprecedented intervention measures rolled out in the past month include a ban on initial public offerings and short selling, tried through much of the financial world during the financial crisis without much success, forced purchases of shares by state-owned investors, a ban on sales by leading shareholders and direct credit support from the central bank. Markets do not appreciate Government intervention and the Chinese market is no different. It also creates an expectation, often false, that further intervention will be triggered if markets fall again. Well, it has and the Government has a problem. As reported in the Financial Times, the deputy dean at Shanghai Advanced Institute of Finance said “If the government does nothing then all its previous efforts will have been wasted but if they continue with the rescue efforts then the hole will get bigger and bigger. We hope the regulators will respect the market and the rules of the market.”
The big problem for the government is that its earlier disrespect for market rules and the subsequent rally have left investors expecting ever-greater intervention from the authorities every time the index collapses. In China, stocks are only allowed to fall or rise by a maximum of 10 per cent on any given day before they are automatically temporarily suspended from trading. During the latest sell, which no one can really explain or understand, nearly 1,800 stocks fell by the daily limit of 10 per cent and were suspended, suggesting the overall market collapse would have been much worse than 8.5 per cent if it were not for this rule. The Global economy needs China to be strong and right now investors are trying to work out what is happening, which is impacting all markets. It should, though, be remembered that the link between the Chinese stock market and the economy is often tenuous and it likely to be so this time too. Furthermore, with foreign access limited to the local stock market, the intrigues of the Chinese market have little impact on portfolios of the foreign investment community- us. Whilst our Asian funds do have Chinese exposure the direct impact of the Chinese market tumble is not dramatic upon them. Perhaps an opportunity? We think so.
“Those of a nervous disposition can be forgiven for being less than sanguine about world events, but we prefer to look through such short-term media hyperbole and concentrate on the long-term opportunities that exist globally for growth-focused stock-pickers.
The US economy continues on the road to recovery, albeit with bumps along the way. The return of stronger job growth and buoyant consumer spending in May is likely to bolster the resolve of officials at the Federal Reserve who hope to start raising rates from their near-zero level later this year. Certainly, we view a normalisation of monetary policy as a positive signal; the patient coming off life support” reported the Managers of Baillie Gifford International, which features in most of our portfolios. Their statement is one with which we concur and we support the long term view rather than the often knee jerk reactions that can destroy value.
We have just seen very positive economic data released in the UK that indicates growth continues to progress, which is good news for many of our funds and portfolios and provides some justifiable optimism that earnings will reap the benefit and values will quietly increase. No doubt this will lead to much speculation about the likely timing of a base rate rise by the Bank of England over the next weeks. It is unlikely that the Bank of England will jump in front of the US and much more likely that they will follow the US lead.
Europe has stuttered a little as the Greek tragedy played out. Europe is home to a number of world-class businesses with a global reach. We remain strong supporters of European exposure in almost all portfolios. Europe offers the potential for very positive returns if it can get settled and deal with some structural issues that hinder progress.
The large number of imponderables will undoubtedly cause further volatility in markets over the coming months. Has the Greek problem been dealt with? What is happening to markets in China? When will the Federal Reserve take the plunge and start to normalise interest rates? When will rates rise in the UK? Our job, with the fund managers we support, is to look through the sentiment that manipulates markets in the short term and let them identify companies that can sustainably grow their earnings at above average rates and avoid being distracted by the noise which is often greatly unsettling for investors.