BLOG: Markets seem to be matching the dreary weather
Global equity markets have declined as investors continue to weigh up the prospects for economic and corporate growth against the risks of disappointment or unwanted surprises. 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. 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.
For the moment investors have moved their focus to the woes of the Chinese market which has been hit by significant volatility. The bull market accelerated at a ridiculous rate over a short period, increasing by around 150%, but looks to have come to an end with a 20% fall. Local retail investors were encouraged to invest in the stockmarket by the Chinese government as they were viewed as cheap amid concerns that property was creating a bubble. 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. Markets do not appreciate Government intervention; it creates an expectation that further intervention will be triggered if markets fall again. 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.
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 there is often no link between the Chinese stock market and the economy and it likely to be so this time too. The economy is still growing. Furthermore, with foreign access limited to the local stock market, the machinations of the Chinese market have little impact on portfolios of the foreign investment community. For investors this is perhaps an opportunity
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.
We have just seen very positive economic data released in the UK that indicates growth continues to progress, which is good news for investors 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 few months, although August’s meeting saw just one vote to raise rates. 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. Europe offers the potential for very positive returns if it can get settled and deal with some structural issues that hinder progress.
For investors the important thing is to look through the sentiment that manipulates markets in the short term and identify companies that can sustainably grow their earnings at above average rates and avoid being distracted by the noise which is often greatly unsettling.
Douglas Kearney is investment director at Intelligent Pensions