Though the media appears to have moved on to more newsworthy events and issues, concerns around the future direction of global markets continue to bubble along, particularly in relation to US interest rates and the risk of a Chinese slowdown.

We continue to observe economist’s op-eds, attend Fund Manager Briefings, and watch for macro economic data, looking for further evidence of any likely shift in direction.

Last week I, along with a significant number of others, attended a briefing provided by Hamish Douglass of Magellan Funds Management. Magellan is a highly respected international equity manager and some of the key takeaways from that presentation included:

  • Many defensive stocks are looking a bit expensive due to the continued low interest rate environment and the chase for yield;
  • Financial markets appear to be pricing in a lower expected interest rate trajectory compared with what the Fed is signalling;
  • The US continues to grow at a ‘moderate pace’ with some headwinds;
  • Deleveraging appears to be freeing up household wallets in the US with US Household Debt to GDP falling from 96% in 2009 to around 77% in 2015 (inline with 2003 levels); and
  • US rate increases are expected to be very gradual as the Fed attempts to avoid a repeat of 1994.
  • China’s GDP growth has been the result of a number of different strategies since 1980:
    • From 1980 to 2007, exports as a percentage of GDP grew from 6% to 35%;
    • Between 2007 and 2014 credit growth rose 124%; and
    • Since 2014 the emphasis has been on encouraging consumption growth thereby reducing the reliance on government expenditure to achieve the desired GDP numbers
  • China’s economy IS slowing down
Average growth p.a. 2000-2008 2009-2013 Latest
Real GDP 9% 9% 7%
Credit* 14% 19% 16%
Steel Production 15% 11% -4%
Electricity Production 11% 12% 1%
Cement Production 11% 11% -5%
Urban housing Completions 9% 10% -14%

*Financial institutions RMB loans

  • China has around 3-4 years of excess supply in the housing market. A comparison was made with the results of the US housing market oversupply situation pre-GFC which suggested with around 4 years of excess supply, the market fell 75% and took 8 years to normalise. We note however that the fall occurred in the middle of a credit crisis; and
  • China continues to have policy options with strong foreign reserves and less lobby group interference with regards to policymaking.

Overall their view is that although Chinese growth is slowing, the Government has the means to make shifts in monetary and fiscal policy in order to better manage economic (GDP) growth.

They see China as likely continuing to sell foreign exchange reserves (U.S. Treasuries) and buying domestic assets to support the economy, and that a large devaluation in the Chinese RMB is unlikely.

They are somewhat cautious about emerging markets however and with interest rates more likely to move higher in the coming year, they are suggesting fixed interest investors should be reducing the overall duration of their portfolios to reduce risk. (We note that many of our fixed interest managers in our model portfolios, are reducing or have reduced the overall portfolio ‘duration to maturity’ in expectation of future interest rate movements.

On an aside, I found a most interesting article written by Shane Oliver, chief economist at AMP Capital yesterday which I am keen to share. It puts the recent market falls into context and reminds us that things are not always what they seem when you take a broader view.

As always, this is general information and does not take into consideration your personal circumstances. If you have any concerns in relation to your own situation, or changes have occurred and a review is required, please contact your adviser.

 

Happy reading!


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