Happy New Year Everyone!
2016 has kicked off with a wobbly period for stock markets and a lot of you have been asking why. Let me just say before I attempt to give any explanation that stock markets can react for a whole host of reasons, and whilst we like to have certainty and explain what the reasons are they’re not always clear. But there are two ones that are major candidates and they’re linked. First is that China is slowing down and I said in an article in the latter part of 2015 and at our client seminars in December 2015 that China has to slow down; it has to re-balance; it has to move from being investment led to consumer led and as it goes through that process its rate of GDP growth is going to slow down. That’s not a bad thing. That will help to re-balance the world’s finances and that will actually reduce the risk of the occurrence of another crisis like we had in 2008. The second one which is linked is that because China is slowing down, it is not sucking in as many commodities as it was previously. So commodity prices have been dropping and with them oil, which for a period at least slipped below $30 a barrel – that’s a big fall from where oil was in 2014. A lot of people are saying that this is really bad for the global economy; why I don’t know – oil prices are a zero-sum game. If the price falls then less money is being paid to oil exporters and that means that the oil importers have more money to spend. As I said before the problem is that the exporters feel the pain first before the gain is felt in the pockets of western consumers, but that will be a positive thing in the long run.
Meanwhile, for those that have been saying this is resembling the global financial crisis of 2008 then shame on you. It looks nothing like 2008. There may be different problems this year, but one that we are being very careful about is inflation, because if the economies recover better than currently anticipated then interest rates are likely to rise further and that will be very bad for bond holders – we are very wary of this.
Gary Reynolds CFA ACII DipPFS IMC Chartered FCSI
Chief Investment Officer
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