2nd September 2015
Rowan Dartington’s Guy Stephens looks at this week’s developments in China…
This week sees the big players return from the beach and the first meetings of investment committees which have been in absentia during August. This has been all the more poignant as this last week saw the largest ever points drop on the Dow, and the highest volatility for four years. It really does feel like the mice have been playing whilst the cats have been away. Hopefully some rational thinking will come to the fore very soon as the theory behind the efficient market frontier, correctly pricing all market knowledge at any one time, is currently seriously exposed as the FTSE-100 swings around by 2.5% on very little new news.
The latest weakness relates to more disappointing Chinese data which is suggesting that the manufacturing purchasing managers’ index is at a three year low. Those that discounted the Chinese growth scare as a holiday-induced aberration are now back in their box and we can see that the markets were not quite so hasty after all. It doesn’t help that the Chinese authorities are blaming the whole issue on misreporting by the media – suggesting there really is a problem as the authorities are going to such lengths to defer blame to anyone but themselves. This feels like a classic case of the emperor’s new clothes; visible only to the Chinese authorities. The more the state tries to cover up, the more questioning the West will do as to what the reality really is, and any piece of negative data will be seized upon to support the democratic, anti-communist cause. Unfortunately, this puts the markets in a prejudiced mood where they are looking for bad news to support the behavioural sceptical bias. Even if the Chinese economy does deliver better data, no-one will believe it, with confidence not helped by the recent muzzling of the media.
These are dangerous times for the Chinese regime, whose fear of the people is probably their biggest area of vulnerability. The period following the Millennium will be remembered for the proliferation of the internet and social media and all this has done for free speech, democracy and the empowerment of the populace where our leaders are held accountable for everything they have ever done or said. Trying to suppress and control this is futile, and can only be done through fear for so long before the human spirit breaks through. For the moment, the fear resides with the potential backlash from the middle-class investor who has just lost a chunk of his savings playing the stock market. This fear is probably misplaced as the decision to play the stock market was a voluntary one and for now, the investor only has himself to blame. The state has tried hard to support the market and is now blaming the media for escalating the panic.
Of much greater significance is the implication of slower growth and the potential for job losses. China can no longer create jobs by further extending infrastructure spending, whichhas been reduced as part of their rebalancing of the economy from export manufacturer and construction site to a consumer led powerhouse. The difficulty is that the first two are currently falling at a pace which is not matched by the growth in the last. In addition, the losses on the stock market are likely to cause austerity with the consumer where many have had their savings wiped out – a perfect storm. We all know that investing in the stock market is a long term game and you have to live with the volatility and inevitable scary periods in pursuit of the final goal, where real returns will be the best available. Slow and gradual wins the race, short-term investment with leverage is only for those who know what they are doing and can afford to lose everything in pursuit of high rewards. Unfortunately, the retail investor has been able, and encouraged, to adopt the second form of investment which is speculation and not investing.
We read reports of the Australian economy falling into recession as the mining demand from China continues to fall along with prices. We also read that the Baltic Dry Index, which measures the price of moving major raw materials by sea, has fallen by 20% since the beginning of August. So whilst China continues to expound the virtues of the emperor’s new clothes, every single independent index connected to the wearer is telling us what we suspect. This suspicion will hang over the markets until the next set of GDP figures are released in October. In the meantime, the market is also fretting about US and UK interest rates, and when and how much will be the rise.
All in all, not a great cocktail of news for a confident upward move in markets. That said, with all volatile situations, there are opportunities and equities remain the most attractive asset class whilst US growth remains robust. Payroll numbers on Friday are the next key indicator and, in tune with the upgraded US GDP number, they should be robust. They better had be!