by Don Wernham – Simple Solutions
WE are continuing to see the recovery in markets since the August correction and as predicted there was very little to get concerned about. But what really did happen in August?
Well in the space of about 4 days the Chinese government devalued its currency by around 4%. Markets feared that this devaluation was just the tip of the iceberg and thought that there would be a greater devaluation to come. It didn’t happen. However the action of the Chinese government started a chain reaction that led to outflows of Renminbi held assets back into Dollar or Hong Kong Dollar held assets.
The press then picked up on this and cited China’s trading partners, which they ultimately thought would be affected. Some of these partners included emerging market economies and they then pointed out that they too would have a difficult time.
The press then made the worst mistake in looking at commodity prices instead of volumes and further cited this as evidence of a real slowdown in China. The price of Crude oil has dropped by around 60% in the last 12 months. If you look at trading volumes of oil that China is importing it is very slightly down during the last year. However, because almost all commodities are traded in the US Dollar, and this currency is very strong, it is this that is distorting the figures. The slowdown in China, therefore, is nowhere near as bad as some people would have you believe.
So is China slowing?
Yes. But this is not new news. The Chinese government told us this back in 2012 and that is why what happened in August was nothing to worry about. In the last 25 years China has gone from inefficient agricultural workers to efficient city workers. They have built cities all over the country and have been the manufacturing supplier to the world. This period has seen rapid growth in their economy. In the aftermath of 2008 and the banking crisis, the Chinese economy was booming. This could not possibly continue to happen. But just let me say that had it not been for China after the credit crunch in 2008, the global economy would be in a far worst state today than it is. It was China that single handed drove the world economy and we are all the better for it. But in 2012 the Chinese government said they wanted to reposition the economy away from manufacturing and more into service based industry, like here in the UK.
Getting this into perspective.
In the United States manufacturing is also slowing, and recent figures show this to be at a rate of 13%. In China the manufacturing is still around 45%. So China has a lot of slowing down still to do to get to the levels of the US.
So what is going to happen?
I am tempted to say – don’t ask me, what do I know? However given what I have said above, I think that in early 2016 the trade numbers are going to reverse. So whereas the strong dollar and weak commodity prices are having a negative impact now, in 2016 the year on year figures will be factoring in a strong dollar which will have a positive impact on these year on year figures. This will almost certainly have a positive effect on global equities and the financial markets in general.
Interest Rates & Currencies
In the US they recently decided to keep interest rates on hold which surprised the markets. I suspect that this was done in an attempt to help the global economy, as well as the strength of the US dollar. However, I still think a rate rise will happen in around the spring of 2016. But, these future rises are likely to be very small indeed, possibly 0.25% at a time. In the UK I still don’t think a rate rise is on the cards for a while yet, but again, when it does come, like in the US it will be in very small stages. In Europe the European Central Bank is considering another bout of Quantitative easing (QE) and if this happens, which I think it will, then you can expect to see the Euro currency fall further.
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*views and opinions are of Don Wernham and Simple Solutions and this does not constitute advice.
