NO BEAR – JUST A ‘MARKET CORRECTION’

The current downturn in global financial markets is a correction rather than the beginning of a bear market, and global investors should have expected it given the weak economic growth globally, asset managers say.

They say share prices were elevated to unsustainable levels that were out of sync with weak global economic growth.

The aggressive selling-off of shares on Chinese markets after the Chinese government devalued its currency, the Renminbi, coupled with weak manufacturing numbers, set off more selling on financial markets around the world.

But, actually, markets had started to retreat over the past few months. The most recent turmoil was just a more violent expression of this, Clyde Rossouw and Sumesh Chetty, portfolio managers at Investec Asset Management, say.

Both they and Peter Brooke, the head of Old Mutual Investment Group’s MacroSolutions boutique, say there was a disconnect between the slowing economic growth and the rising Chinese share market and it was not sustainable.

Herman van Papendorp, the head of macro research and asset allocation, and Sanisha Packirisamy, economist at Momentum Investments, say relatively strong economic growth in China and the unprecedented liquidity as a result of global central banks’ easy monetary policies have been the two main forces that have supported the global economy and financial markets since the 2008 global financial crisis.

Investors now see economic growth in China faltering amid their fears that the US Federal Reserve is on the verge of increasing interest rates for the first time in over a decade.

Van Papendorp and Packirisamy say emerging market currencies, including the rand, weakened sharply in response to China’s devaluation of its currency, in an attempt to regain competitiveness for their exporters.

Brooke says a number of emerging markets have been under pressure for some time, with the Chinese stock market, as measured by the Shanghai Composite Index, in a clear bear market and falling 44 percent from its peak in June to its recent trough. However, most developed markets and South Africa had been performing well until the panic this month. The fears about China’s economy triggered a sharp correction of more than 10 percent on most markets, he says.

Brooke says a correction was expected, because markets had become expensive and had moved away from the underlying fundamentals. However, he does not think this will result in a global bear market. Furthermore, as many asset managers had sold equity in advance, they have cash to buy shares as they become cheaper.

Rossouw and Chetty say the market slowdown will continue until market valuations (the price of shares relative to their expected earnings) are more in line with the muted economic growth expectations.

Brooke says that although Chinese growth appears to be slowing quicker than previously expected, the Chinese authorities have the ammunition to prevent a collapse of their economy.

He says the most important thing for you to remember is that an equity market fall creates opportunities and panicked selling will only mean missing out on these opportunities.

Templeton Global Macro’s chief investment officer, Michael Hasenstab, and its director of research, Sonal Desai, say investors on global financial markets reacted as if China was headed for a full-blown recession, but they don’t believe this will be the case – they believe that China’s economic growth will, instead, moderate as its economy normalises.

They say the Chinese government will control the pace of the currency devaluation as it incrementally moves towards a more market-driven environment. The latest events are not a signal of a massive currency depreciation to come, they say.

Hasenstab and Desai say they still expect the US Federal Reserve to raise interest rates in that country this year. They also say that while volatile markets are not comfortable for investors, they see opportunity in the current period of volatility.