The Great Fall of China

Investors have been nervous about the slowdown in China’s economy for some time, however, in the last week, this has become a reality for global markets which have experienced a very sharp sell-off.

Investors have been nervous about the slowdown in China’s economy for some time, however, in the last week, this has become a reality for global markets which have experienced a very sharp sell-off.

Chinese growth slowed to 7.4% in 2014, its lowest rate in 24 years. Since then, growth forecasts for 2015 have been under continued pressure and the CBI now estimates the economy will grow by 6.3%. China is trying to shift its economy from investment-led to consumer-driven. This was never going to be a smooth transition given the scale of the economy and double digit growth was clearly not sustainable.

China has made attempts to nullify this economic slowdown by easing monetary policy. They also devalued the remnimbi yuan on two consecutive days this month (to a four year low) which opened up fears of a potential currency war and competitive devaluation, causing further volatility to global markets. Commodities led the sell-off, reflecting a weakening global demand.

Today, China has reacted by cutting interest rates to 4.6% and loosening constraints on bank lending, which has caused European stocks to have their strongest surge on any one day since 2011, just a day after experiencing their biggest loss in 4 years.

Concerns over the global economy will, if anything, delay an interest rate rise in the west further. Despite optimism over the domestic economy, growth will clearly be impacted by the ongoing headwinds facing global markets. If the global economy was to take a turn for the worse, the UK and U.S. currently have limited tools to deal with an economic crisis as interest rates are at an all-time low. Central banks would be backed into a corner and interest rates could even turn negative before they go up.

Three possible takes on recent market developments

1. Take the view that the market sell-off has further to go, China’s economic concerns will worsen and, as a result, global growth will slow and volatility will continue to ripple across global equity markets.

2. Take a bullish view that this is a short term blip and markets will rebound strongly and buy into cyclical stocks, with significant export exposure to China.

3. Take a cautiously optimistic view on the market, but seek to take advantage of buying opportunities on stocks which have very resilient revenue streams and may have been oversold.

Our View

Our take on the current situation is the final view. Whilst we are optimistic that China’s slowdown will not trigger a global financial crisis, we are aware that markets are likely to experience volatility over the short term so are therefore cautious about taking a cyclical investment strategy. At Seabrook Clark, we do not attempt to time market cycles and are long term investors, therefore we focus on company fundamentals. Therefore, when a sell-off occurs, we seek opportunities to invest in quality companies which have been in our view unjustly affected by weak market sentiment.

After all, UK growth forecasts for 2015 and 2016 have both been upgraded. Consumers have more spending power as real wages have risen strongly this year in an environment of low inflation. This benefit to consumers is likely to continue with little inflationary pressure and an improving domestic economic picture to support wage growth.
Please note, this article is our view of markets and does not constitute investment advice. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch.

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