Market Update: Stay Calm and Don’t Worry

We have seen incredible volatility in the markets and sharp falls since the turn of the year, even more so than we saw in the second half of 2015.

This is unfortunate as generally the economic picture is relatively benign but what we are seeing is sentiment driven volatility.

The “slowdown” in China still has it growing at rates most developed countries can only dream of and it is absolutely essential to avoid a huge crash further down the road as they transition from manufacturing/export to service industries.

As usual in difficult market conditions we have looked to our investment managers for some words of wisdom.

Lothar Mentel, Tatton Investment Management

During last Friday’s frantic market action, which bore first signs of ‘capitulation’, I had hoped not having to write about depressed market conditions for a 3rd week. However, as I wrote last week once a sell-off gets going, the ensuing rush for the exit by short term investors and liquidity squeezes amongst leveraged investors creates a dynamic of its own which is very hard to gauge and even harder to rationalise from an economic perspective. The kick-off to the annual World Economic Forum in Davos was therefore somewhat welcome distraction from what has become the worst start to the year in 4 decades. Davos also matters this year because many reputable economists and institutions present and discuss their economic expectations for the year ahead. This has been helpful, because most stated that they still expect a continuation of the path of gradual economic expansion and see a low likelihood of an economic crash scenario, which the market action of the past 3 weeks appears to suggest. Having been burnt in the past, however, most of them also hedged their views with the warning that extreme market action can negatively influence economic decision making.   

Douglas Spence, Investec Wealth

In spite the gloom and volatility of the markets, the International Monetary Fund have stated that the financial markets are ‘over-reacting’ and still expect Global GDP to pick up during 2016. We are clearly in the midst of a market correction, fuelled by the economic data coming out of China, significant drops in commodity prices, in particular Oil, not to mention swings in international currencies. Increased attention on headwinds posed by Sovereign Wealth Fund (SWF) selling, as oil-producing countries are being forced to dump foreign assets in order to cover widening budget gaps. It was noted today by Jefferies that SWF selling is exacerbating the global market rout, and oil-producers have transitioned from an “excess savings glut” to an “excess selling glut”. Bloomberg pointed out Saudi Arabia’s foreign-exchange reserves have fallen by more than $100B since mid-2015. Similarly, a number of Hedge funds are liquidating position following poor performance over the past couple of years.

Whilst the wild market swings are concerning, there is still enough positive data to form the opinion that this market correction is now starting to look over-done and it is not our central thesis that we are about to head into a Global Financial recession.

I hope you find this useful and reassuring. Please feel free to contact us if you have any questions.