Sudden sell-offs in equities markets are always uncomfortable be it as a retail investor or experienced portfolio manager. The trigger for this sell-off is two-fold: China and Oil.
In terms of China, nothing has changed since our last update as the country makes the transition from a manufacturing based economy to a consumer driven
economy. The stock market in China had surged too far in 2014/15 (up over 150%) and has been declining since then, despite heavy-handed state intervention.
The Chinese currency (the renminbi) will be admitted to the International Monetary Fund’s special basket of currencies in October, joining the US dollar, Euro, Japanese Yen and British pound. One of the conditions of entry was for the Yuan to be more freely valued than singularly linked to the US dollar.
The oil price weakness has seen a barrel of oil drop to $27 a barrel, with the market trying to find a floor. The dramatic fall of over 75% since mid-2014 is because OPEC and other oil exporters have increased supply meaning there is now more oil being pumped out of the ground than we need.
Millions of barrels of unsold oil are being stored on supertankers, leading to record high rates – booking a tanker on a one-year time charter has spiked to over $50,000 a day – double the rate last year.
Though these are concerning we believe that the global economy, especially the consumer in the West is in ok shape. We continue to see record employment in the US and the UK, while the Eurozone is finally showing signs of growth. The main beneficiaries to a low oil price will be the consumer in the developed world and the less we pay at the pump, the more disposable income we have which will ultimately help support GDP growth.
Though we will continue to be wary, we do not believe that we face the same issues we did in 2008, the end of the financial system as we know it or 2011 during the Eurozone crisis where there was a real risk that the Eurozone would be disbanded. We believe this to be a ‘normal’ correction and a function of a healthy equity market (albeit an uncomfortable one!)
We will continue to monitor markets and look for opportunities where we can buy assets at attractive values.