August 25th, 2015
Markets have hit their lowest point since January and blame must lie firmly at China’s door. From slowing economic growth to currency devaluation to stockmarket volatility, there would certainly appear to be plenty to worry about. But how far could this weakness extend?
Markets have rightly been concerned about demand for commodities, and oil and mining stocks have been hit hard. This has had a disproportionate effect on the FTSE 100, of which they make up around a fifth. Hargreaves Lansdown points out that, since the start of the year, the FTSE 100 has returned just 0.5% including dividends – but, stripping out oil and mining stocks, it has returned 4.8%.
|“China always brings a tendency to hyperbole – its opacity often making investors fear the worst.“|
The commodities rout has also hurt those managers who had started to take a tentative bet on cyclical stocks, assuming improving economic data in the eurozone and elsewhere. A number of high-profile value investors had considered the miners cheap enough to merit re-examination. They may be proved right but, in the meantime, the ride is proving painful.
Emerging markets are the other notable victim. J.P. Morgan Asset Management, for example, believes weakness is likely to endure for some time, pointing out that China continues to play a central role in driving demand for major commodities – and lower demand inevitably means lower commodity prices.
Although emerging markets and commodities may be at the vanguard of China weakness, however, there are other implications – for example, commodities weakness is likely to keep a lid on global inflation, which in turn has an implication for interest rate rises.
The US Federal Reserve minutes from July noted: “Most [officials] judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point.” Policymakers said they were still concerned about moving prematurely and then lacking the tools to address any downside shocks to the economy. China was cited as the key risk.
That said, it may be that the China risk has been overplayed. It is the silly season after all, where thin volumes ensure extreme moves. China always brings a tendency to hyperbole – its opacity often making investors fear the worst. The recent inflation data from the UK shows that the impact of lower commodities prices may not be as profound as investors believe.
For now, it is difficult to see what would reassure investors. Monetary easing, for example, has been dismissed as the last hurrah from desperate Chinese policymakers. For the time being at least, markets are in no mood to be rational about China.