August Market Analysis

It’s Summer; it’s raining; there are two 48-hour tube strikes in London threatened, and every stock market and major commodity in the world is in the red. The first day back in the office after a holiday in Spain where the only worry was mild second-hand embarrassment for the worst UK export: lobster-red, middle-aged British men in Hawaiian shorts and football shirts.

Is this purely summer madness or is this a serious situation that changes my whole thesis for investing?

China’s GDP growth is slowing from 7% to somewhere lower and more opaque: not exactly a shock, and something we’ve all heard about before. The 3% devaluation of the Chinese renminbi against the dollar earlier this month was unexpected, however. We must be careful how we judge equity markets in terms of the weaker renminbi. The Chinese government has already admitted it is trying to introduce greater market forces to the economy as part of its transition from an investment-led to consumption-driven growth strategy. What we are seeing in the east appears to be the growing pains from that readjustment.

Ultimately, the sell-off in global equities has been driven by how exposed companies, the likes of BMW and Audi are to the Chinese economy, or to prices dependent on Chinese demand (such as commodities). This is a belated market realisation of the lower Chinese growth reality. These market fallouts can be short lived and most developed and emerging markets have now begun to recover somewhat, although China and Japan remain in the doldrums.

A sentiment-fuelled sell-off creates a perfect opportunity for an active manager to exploit short-term fluctuations by sorting the likely winners from the losers, and buying favourable shares at better prices. I believe what happened earlier this week was about sentiment, not fundamentals.

Equity markets are down between 20% and 10% from their peaks earlier this year (although the Shanghai Composite is down much more). I am buying equities at reasonable prices for the long term. It’s not the end of the world: the tube strikes were cancelled, developed markets are recovering and there are no Hawaiian shorts in the office.

The sun couldn’t manage much more than a morning, but you can’t have it all – this is the UK after all.

This article was provided by Rathbones Fund Management.