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US & China Drive Volatility: Our Global Market Observation

Aug 27, 2015 | Market & The Economy | 1 comment

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There has been extensive media coverage over the recent global volatility in markets and currencies, and the impact on our own markets in South Africa. We feel that it is important to put these developments into context.

The JSE index in March 2009 stood at 16,000; in April 2015, it hit nearly 55,000 points. It has been a long bull market run during which most participants have been pleasantly surprised. Foreign investors have been throwing money at emerging markets (including SA) in search of higher interest rate yields and equity returns to bolster their portfolios. This sheer weight of money for the first few years dramatically strengthened our currency (remember R6/$ or R11/£). Since April this year the JSE has lost almost 14%. Capital outflows out of emerging markets were $1 trillion in the last 13 months; most emerging market currencies have devalued dramatically in that time, not just the Rand. As a matter of fact our Rand has held up relatively well versus other emerging market currencies.

The global uncertainty of the two biggest economies in the world — namely USA and China — is driving the current volatility in world markets.

China slowing but still growing

The real danger with China is that it is changing from an infrastructure-driven economy to a consumer-based economy. China used more cement in the last three years than the U.S. used in the entire 20th century. The infrastructure spend is largely complete. This change is having a dramatic effect on commodity prices globally, the JSE Resources index is down over 40%. China has had remarkable economic growth of 10% per annum over the last few years but it announced that this would slow to 7-8% growth. Part of what the markets are afraid of currently is if this number falls to 4%. Some even fear a negative number (recession or hard landing).

The fact that China also recently devalued its currency is also an indication that it is trying to stimulate growth.

US Economy

The US Economy has been growing slowly and there have been a number of positive signs. The Fed has indicated the intention to increase interest rates to more normalized levels. This will mean less liquidity and the powers that be need to be careful it doesn’t slow economic growth.  It will have to be a very measured approach. This has given rise to a strong USD currency which in turn is detrimental to economic growth as exports become relatively expensive. Markets are uncertain of what will happen and this has given rise to the volatility we are experiencing.

Markets have fallen: What do you do now?

It is impossible to predict what will happen next in the global economy but one’s reactions need to be as unemotional as possible. This is more easily said than done. Remember market volatility and corrections are normal. Control the things you can control and unless your personal situation has changed significantly and you need a different investment mandate, you must stick to the plan and stay the course. We’d like to highlight that your investment portfolios are very well diversified: for those of you with South African funds, these managers have been lowering exposure to SA equity and maxing out on offshore exposure for the past few years which has protected you from a weakening rand.

We look forward to seeing you at your next review meeting.


1 Comment

  1. Chris Banks

    Timely and balanced summary. Thanks,


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