Posted on 28 January 2016
Stock markets have endured their worst start to the year in decades. The current market volatility is extremely uncomfortable and the environment could persist for longer. However, as evidenced by last week’s gains, we know that it can reverse violently, often with no obvious catalyst.
There are several significant challenges that have triggered renewed worries for global economic growth:
Falling oil prices
The devaluation of the Chinese currency (renmimbi)
Fear that the US Federal Reserve may be raising interest too soon or that this change will weaken other currencies relative to the dollar
Sluggish economic growth elsewhere and fears that falling commodity prices will damage the commodity producing economies
A very mixed picture on corporate profits growth and fears that the market will be disappointed in the coming months
It is clear that none of this is ‘news’ - most of these concerns were raised last year – so we should bear in mind that the market price of a financial asset is often an indicator of investors’ sentiment rather than a scientific calculation of the value of that asset.
One of the consequences is that headline inflation has fallen sharply such that the wage rises in the US and UK are positive in real terms and this is helping to support activity in their dominant service sectors. As a result, it is highly unlikely that the fourth quarter company results season will be as gloomy as investors fear.
The vital question is whether the market’s pessimism is justified. Our analysis is clear: the global economy faces some challenges but the key drivers of growth are not broken.
China’s economy is in transition, but we should not mistake weak manufacturing data for weakness across the whole economy with the increasingly dominant services sector still experiencing very strong growth.
Whilst lower oil prices are negative for oil producing countries, there is a great deal of off-setting good news. The world consumes around 90m barrels of oil per day: with oil prices well over $60 a barrel lower today than in late 2014, the collapse in oil prices has shifted over $2tn (somewhere around 2.5% of global GDP) of annual spending power from producers to users. Lower oil prices mean lower input costs for many companies (a helpful boost for margins) but, more significantly, it means a significant boost to disposable income for consumers as it costs less to fuel our cars and heat our homes. No wonder consumer confidence is strong and household spending on goods and services is robust…
Periods of indiscriminate sell offs present opportunities to investment managers but with uncertainties confronting the global economy, we continue to seek a cautious attitude from our investment partners. It is worth noting that all of our client portfolios remain broadly spread across sectors and economies to diversify risk as far as possible and this strategy is again proving its worth in this current phase of the investment cycle.
If you have any questions or want to discuss your individual situation further, please give us a call on 0844 3350538.
Smith Cooper Independent Financial Solutions Ltd is authorised and regulated by the Financial Conduct Authority (443209). This information is based on our current understanding of legislation and regulations.