With concerns over recent volatility in global stockmarkets, should we be worried about China? That’s the question on Brian Tora’s mind
The start of 2018 felt comfortable, with the global bull market appearing intact. The beginning of February was a different matter altogether. Spooked by a sell-off on Wall Street as news of rising wage inflation emerged, investors around the world took to their heels and volatility returned in spades. It was all rather short lived, but it did rattle a few cages.
The burning question in the aftermath of what we all hoped was a mere correction in a sustained bull market in February was, does this represent the commencement of a more sinister turn of events? The risk, of course, is that a higher cost of labour in the world’s largest economy will push inflation up and encourage the Fed, under its new boss, to accelerate the interest rate rises that are expected. Dearer money will not only impact upon consumer spending and business investment, it will also make equity valuations look even more extended.
Strength in numbers
At the core of the bull argument for shares lies the strength of the global economy. Comments from such august organisations as the International Monetary Fund have become increasingly optimistic. Analysts clearly believe that President Trump’s tax reforms will aid growth in the US, while recently published data from China suggests that the economy there grew by nearly 7% in 2017 – the first time a year-on-year increase has been achieved since 2010.
Of course, this is still rather less than the heydays of the early years of this millennium when double digit growth was the norm (in 2007 the Chinese recorded GDP growth of over 14%), but it is impressive nonetheless. The only problem is, can these numbers really be trusted? There are already indications that some areas of the country may have overstated numbers for the year just ended, but in a command economy like that of China, you get what the leadership is prepared to let you have.
And so to China
Recent action from the government there suggests they are resigned to a slower growth rate, though not everything they have done adds to a feeling of confidence. Earlier interference with the workings of the stock market was worrying, while China’s property and banking sectors still provide cause for concern. The policymakers there seem to be willing to address financial issues created by the rapid expansion in economic activity of recent years, while the environment is taking greater prominence now. This could, of course, impact on some areas of the economy there, such as infrastructure spending. However, on the plus side, the move to a more consumer led economy appears to be working well and there is still considerable scope for increases to the standard of living for many in this, the world’s most populous nation.
As with all forecasting, it is not possible to be sure that one of the vulnerable areas in China’s economic structures might not suddenly turn into a greater problem than feared, but so far they have proved adept at averting disasters. Recently, the Chinese renmimbi has been allowed to drift up against the US dollar in particular, perhaps a sign of greater confidence there. But geo-political concerns could re-emerge, with North Korea a continuing source of worry.
That China is destined to become the most important economy on the planet seems inevitable. But they are not the only kid on the block in Asia. In a recent report, Goldman Sachs was particularly optimistic for India, following a series of reforms that should add impetus to the economy in the future. Indeed, they generally considered Asia capable of maintaining a high level of growth in the coming year, with the main risks being higher inflation and a consequent increase in interest rates.
What can we expect?
Which brings us straight back to the source of the hiccup in markets in early February. You only have to read fund managers’ recent reports to realise that many are concerned that this bull market, now arguably the second longest on record, cannot continue indefinitely. One thing is for certain in the investment business. Markets always travel too far, whichever direction they are moving. The trick is to sell before the top and buy before the nadir of a market’s fortunes, but that is much easier to say than to actually implement.
At the moment the global economic environment appears benign, with growth likely to build as the year progresses. However, investors need to be mindful of underlying trends for inflation in particular. We have become far too used to a cheap money world, with central banks dishing out cash like there is no tomorrow. While it has arguably worked, in that the financial storm of a decade ago did not result in an economic rout, it will come to an end. The new normal could well be different to conditions pre 2008, with central banks and governments anxious not to undo the good work achieved, but it would be naive not to expect some consequences for markets. When this might happen is far from certain.