Over the recent trading days, global stock markets have been hit by growing concerns about lower growth due to the devaluation that China initiated a few weeks ago. Property management believes that there are fear and increased uncertainty about risk and therefore maintains the allocation in the mixed portfolios.
There were several simultaneous negative news that hit the financial markets last week – a trend that has continued into this week with the result of further stock falls.
The share decline means rising bond prices and thus lower interest rates, which is positive for the bond portion of Formuepleje’s leveraged and mixed portfolios. The fall in share prices is, of course, negative, and wealth management has unfortunately not been able to prevent the negative developments for the portfolios, but we believe that as a long-term investor one should look through the current price fluctuations.
Property management therefore currently maintains the overall allocation between equities and bonds in the portfolios, as the Investment Committee has not changed its view of the long-term economic development.
The primary reason for the current stock decline comes from China, which a few weeks ago devalued its currency by about 4 percent.
It has caused concern for the growth of the Chinese economy and fears that Chinese growth is slowing down even more than current data shows. This development has caused commodity prices to fall in general, including the oil price, which has created renewed concern and aversion to risk.
Asset management estimates that the markets are more negative towards the outlook for China’s economy than what appears to be justified economically. China’s devaluation happened to make the currency more market-determined. It is supported by the fact that the Chinese currency has not further weakened since the devaluation last week and that the current trade-weighted rate is 10 percent higher than a year ago.
The consequences of the Chinese devaluation have spread to the emerging market countries that have high dollar debt, as their currencies have also weakened, technically having the effect of increasing the dollar debt measured in local currency. Along with the falling commodity prices, it puts further negative pressure on growth in some of these countries, fearing the expansion of the debt crisis in emerging markets.
The markets fear that any further Chinese devaluation could take the air out of the expansionary monetary policy that, among other things, the European Central Bank currently leads to boost European growth. All in all, the Chinese devaluation has created growing concern and panic among a large number of market participants. We believe that this is a clear overreaction, as the premises for the global growth picture have not changed. Therefore, as an investor, you have to look through the turmoil.
At the same time, we see strong movements in local Chinese A shares due to speculation by private Chinese investors for borrowed money. A large number of restrictions have been imposed on these stocks in an attempt to control the market. The downturn is currently taking place, but the price responses are reinforced by the above challenges.
The “rescue” must come from the United States, which is currently experiencing good but moderate growth. One of the ways in which the US can support the current challenges is to postpone an increase in the US Federal Reserve rate this year. Furthermore, wealth management’s view is that the central banks are ready to support continued global growth.
Basically, the US economy has positive impacts, as the recently completed accounting season showed reasonable earnings growth, though not for the Energy and Materials sectors.