China Sneezes

Every so often we break from our usual weekly (roughly) routine because events take over.The recent sell off in Chinese markets followed by the sharp falls around the world on Monday seems like an appropriate time to make a comment or two.We like to make sure you know that Murphy Wealth and our investment partners are on top of the situation, and hopefully I am able to bring you some reassurance.As with the Greek crisis I have spoken to some of our investment managers to get their take on the recent falls.

As you will see the volatility we are experiencing has been expected for a while but perhaps just not of the magnitude we have seen.

The general consensus is that while China rebalances its economy and we face the first interest rate rise of the market cycle we are likely to see continued volatility.

On the plus side the fundamentals of the global economy are generally sound so the view at the moment is that this is not the end of the current cycle and the beginning of a new global downturn.

The investment managers we have spoken to have all been taking up more defensive positions over the last few months, with an expectation of this kind of event on the horizon.

On a personal note it never ceases to amaze me the impact investor sentiment has of the investment markets, no matter what the macro economic background.

Please read on for comments from two of our investment partners.

Tatton Investment Management

“At Tatton Investment Management we firmly believe and see strong macro-economic evidence that this economic cycle has far longer to run. However, just as in the past, market sentiment first has to climb the ‘wall of worry’ which the first rate rise in a cycle constitutes. At the moment it feels like we have literally fallen off that wall after the advances in the first quarter of 2015. But as long as the economy remains unfazed by the short term capital market nervousness, I am confident that this unpleasant episode will pass just as the previous ones have.

In the past we have taken these market corrections as an opportunity to rebalance portfolios, which meant that they benefitted more strongly from the ensuing stock markets’ recovery. This time around and for the time being we have decided against such action. This is because we are indeed likely to face a first rate rise later this year and in such an environment markets may well continue to be quite volatile. Micro-timing markets in such an environment is fiendishly difficult and we’d rather not expose our investors to any more market volatility than absolutely necessary.”

Brooks MacDonald Asset Management “Whilst the current volatility and increase in risk aversion may continue for a while longer, we believe that the global economic backdrop remains very supportive for equities and bonds beyond the next few months. In our view, the Chinese authorities have sufficient monetary and fiscal tools available to avoid a hard landing, and their long-term plans to open-up the financial markets to international investors is very bullish for global growth and equities.Meanwhile, the fallout from China and the collapse in commodities add another deflationary impulse to the world economy, which will likely lead to a further fall in inflation expectations. At the same time, the negative impact on emerging markets and global trade will soften the more optimistic outlook for developed economic growth over the next year or so.

Hence, it is very likely that the Fed will delay its planned interest rate rise until next year, whilst other central banks will be forced to either remain accommodative for even longer or add further easing measures. In summary, the prevailing macro environment of below trend, but stable growth, low inflation and supportive central banks is intact.”

I hope you find this both informative and interesting.

We are happy to discuss this further if you would like to know more, or have concerns about your own investment portfolio.