Recent market headwinds indicative of a correction or something more?

Stephen Caswell talks about China

Over recent weeks there have been a number of contributors to market volatility leading to a global correction in equity markets. From Australia’s perspective the major influences centre around China and its economic growth rate, the value of the Yuan, and commodity price moves; the impact has been significant and negative with the ASX200 falling from around 5982 in April down to 5036 as I write this article.

Because the PBoC (Peoples Bank of China) has had such a strong policy of maintaining the value of the Yuan (Renminbi) it came as something of a surprise to the markets that the PboC firstly allowed the Yuan to devalue, and secondly that consensus is now that a further 5-8 percent of devaluation is possible. Allowing the Yuan to devalue and allowing market forces to have some (albeit limited) influence is further evidence of China’s rise in terms of a global participant. The impact of a cheaper Yuan has the dual effect of providing a domestic stimulus to China’s economy which appears to be slowing from the desired 7% growth rate trending down toward 6%; and increased domestic inflation whilst exporting lower global inflation. This may impact the timing of global rate cuts and increases, and/or the duration of stimulus measure of other countries such as Australia.

How the ASX, US and Shanghai have done so far this year - Source: Yahoo!7
How the ASX, US and Shanghai have done so far this year – Source: Yahoo!7

A continued slowdown in Emerging markets, which now represent more than 50% of global GDP, on the back of falling commodity prices; slower growth in China; and the devaluation of the Yuan resulting in a collapse in EM currencies, are all weighing on global growth.

Another major contributor to the performance of the Australian share market has been the August company reporting season, whilst reports so far have been okay the potential of earning downgrades for the FY16/17 due to a continuation of the domestic economic slowdown has investors cautious. Strong investor demands for higher yielding stocks are supporting the market whilst resource stocks (now in a secular bear market) remain volatile on the back of commodity price movement and economic news out of China.

The overriding question is, are we in a bear market or is this just a correction? Our view is the latter! Share market valuations are generally alright with comparisons against historic values, when bond yields are taken into account, still relatively cheap; global economic growth is constrained resulting in excess capacity to grow coupled with low inflation and debt. The task is to have an appropriate Asset Allocation and the right managers.

If you have any questions about what this means for you, please contact Stephen Caswell on
9930-6100.