13 January 2016
Following a volatile second half of 2015 the New Year has given indications that 2016 could be equally volatile. During 2015 we highlighted our expectation for increased volatility in investment markets given the strong performance in markets over recent years, and the emergence of a range of risks to global economic growth that have the potential to impact a range of asset prices. These risks included the potential for a Greek exit from the Euro, the move up from zero interest rates in the United States, and the lower rate of growth in Emerging Markets led by the slowing of the Chinese economy.
To date in 2016, the threat of slower growth in China has dominated market performance. It has been clear for a number of years that the world’s second largest economy cannot continue to grow at 10% p.a. and that a slower, more consumer-driven growth trajectory would eventuate in coming years. What has been uncertain has been at what rate Chinese economic growth would slow and whether the Chinese government could engineer a ‘soft landing’ for the economy. In 2015, Chinese officials indicated 6.5% – 7.0% GDP growth as a ‘line in the sand’ for economic growth however recent data points indicate growth has fallen below this level. The December 2015 Purchasing Manager Index (PMI) released on January 4, 2016 indicated that the manufacturing sector in China is contracting, with a reading of 48.2 coming in well below the contraction and expansion level of 50.
During this time, Chinese authorities increased the pace of managed depreciation of the Chinese currency, the Yuan. In August, 2015, the People’s Bank of China shocked markets by initiating a 1.9% move lower in the Yuan, thought by some to reflect growing concerns about the weakness felt by the Chinese export sector, hence, flowing through to the weak manufacturing sector. Concerns started to grow globally that this reflected:
1) considerable domestic weakness in China, and;
2) risk of an outflow of capital from China, potentially signalling further Yuan weakness and possibly a deflationary shock to the global system (clearly something in itself which would be of major concern given the lack of inflationary pressure in most of the global economy)
Local Chinese markets were also aware of the loosening of rules regarding equity lock-ups implemented in the middle of 2015, and hence, there was significant downward pressure on the local equity markets. New limit rules, referred to as “circuit breakers”, saw the Chinese equity markets close limit down, approximately 7%, two days in a week, although these rules were later lifted. The volatility seen in Chinese markets led into selling in other global equity markets, and the US markets were off to their weakest annual start in recent memory.
Our stance on the issue
Notwithstanding our view that 2016 will be a year of heightened volatility, we do not see China creating a systemic risk that will cause a sustained sell-off in global investment markets over the longer term.
However, in the short term it is likely that the uncertainty as to the pace and extent to which the Chinese economy will slow, coupled with this occurring at a time when the US is beginning to raise interest rates, will create periods of elevated market volatility as we are witnessing now.
While the issues in the world’s second largest economy have disappointed and dominated recent market performance, we remain optimistic as to the recovery of the US economy over coming years and anticipate a gradual improvement across the Euro zone as stimulus measures are progressed in that part of the world.
In this environment characterised by uneven global growth and market volatility, we believe investors will need to be highly selective in allocating capital across asset classes and to individual investments. We also believe an active investment approach is required to take advantage of the anticipated higher levels of market volatility throughout 2016.
We remain solely focused on identifying investment opportunities as they arise in the current market environment and are well placed to take advantage of these given we raised cash levels across the funds in the latter half of 2015 in anticipation of increased market volatility. We continue to believe that investors will be well rewarded over the coming years by holding select Australian and offshore equities (presently offshore equities are held on an unhedged basis, given the further downside expectation for the Australian dollar).
Please feel free to contact us with any queries.
Throughout this document Fitzpatricks Private Wealth (Fitzpatricks) refers to Fitzpatricks Dealer Group Pty Ltd ABN 33 093 667 595, holder of Australian Financial Services Licence 247429. Fitzpatricks Private Wealth is a registered business name of Fitzpatricks Dealer Group Pty Ltd.
The information in this publication is of a general nature only. All information has been prepared without taking into account your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate for you.
Past performance is not a reliable indicator of future performance. When we speak of our investment objectives, particularly for performance, it is very important to understand that these are not forecasts, promises or guarantees. They are simply our goals. The performance or success of an investment through our investment strategies is not guaranteed. You can lose as well as make money. Actual performance will differ among clients depending on the timing of their investment and the level of variation from the models.