Chinese tantrums

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Rowan Dartington Signature’s Guy Stephens comments on the effect of Chinese volatility and the elevated ‘Fear Index’ on the market.

2016 has already captured the headlines for being the worst start to a New Year ever for many key stock markets. There is uniformly bearish tone to most of the influences that drive investors and this is often when the contrarian investor starts getting interested.

The market has become very polarised between earnings that appear well supported by macro-economic factors and earnings that look like they are going to go from bad to worse. The valuations in these two areas of the market, not surprisingly, are priced accordingly.

Any stock dependent upon the consumer is looking expensive whilst businesses connected to energy looking cheap. However, the expensive areas also feel comfortable and secure whilst the seemingly cheap areas feel dangerous and foolhardy.

The fundamentals supporting the former look very attractive with full employment in the US and UK allied to rising consumer wealth caused by falls in energy prices, low inflation and real wage growth. The fundamentals underlying the latter look horrible with a stand-off in OPEC over oil supply exacerbated by regional religious tensions and a commodity pricing outlook which may well result in business failures.

However, the news that has really upset the market since the New Year has been the return of Chinese stock market volatility which followed the release of some weaker economic data. Global markets appear easily spooked due to the size and importance of the Chinese economy but also by the lack of transparency, and one of the certain ways to get the investors speculating is a vacuum of information.

This has been demonstrated continually ever since the Federal Reserve started tapering its Quantitative Easing back in 2013. Investors are still analysing and agonising over when the next interest rate rise will be and whether this will derail economic growth and how bad things could get.

Perhaps this is normal human psychological behaviour as we are still feeling the reverberations of the biggest economic crash most investors have ever seen, which is still fresh in the memory. This is doubly disturbing as only a few saw it coming at the time while with hindsight it appeared obvious to most.

So now, every new risk that appears, whether it be Chinese volatility, US interest rates, oil prices, religious tension or weaker GDP data, causes the market to agonise over whether this new risk will be the straw that breaks the proverbial camel’s back and renewed disaster is just around the corner. It is also not lost on many investors that the markets have doubled and halved twice in the last 15 years.

History teaches us that most disastrous economic scenarios are unpredictable and the time to spot them is when the skies are blue and the sun is shining, markets are high, volatility is low and all looks set fair.

This is at odds with the current environment when most are looking for reasons to support their bearish stance. The New Year reverberations around China do not stand up well to scrutiny of the facts.

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