Economic market conditions

By Wayne McCurry – Recent (and ongoing) Market Turmoil

As all of us are aware financial markets, specifically equity, have been very volatile lately, with material falls both locally and globally. This coupled with severe currency fluctuations, has now started to cause anxiety for investors. I will try and make some sense of all of this by explaining the reason, possible outcomes and what investors must consider.

Reasons for the turmoil

The reason is CHINA! Investors are very worried about Chinese growth prospects and the knock-on effects to the rest of the world. The Chinese economy grew very strongly from 2001 until 2008 probably averaging around 10% annual growth. This growth spurt resulted in the Chinses economy becoming the world’s second-biggest economy. Since the global financial crisis in 2008, Chinese growth has averaged around 7% and over the last few years, this has slipped to 6%. The important thing to remember is that the economy is growing, not shrinking, as some news broadcasts seem to imply. Related to these concerns is the collapse of the Shanghai stock market. This is a stock market for domestic Chinese investors and (quite frankly) they went mad and speculated like crazy. This market rose 56% this year to peak in June and since then has fallen about 40%. Chinese investors borrowed heavily to invest and have been burned severely. The Chinese authorities tried to stem the collapse, but it appears as if they have only succeeded in delaying the inevitable fall. Then just to add insult to injury the Chinese government devalued their currency by 2%. This was the actual trigger for the current turmoil, even if the reasons behind are more complex. Everyone is worried: why did the government devalue the currency? Is there something happening that we do not know?

What could happen to markets?

Financial markets are influenced by many variables. They are driven by fear and greed in the shorter term, but over time they react to fundamental economic trends and circumstances. Simply put, they can be very illogical in the shorter term but over time they are very good at reflecting what is actually happening in global economic circumstances. Markets only truly enter a full-blown bear market under very distinct circumstances. You need the following to happen before you get a full-blown bear market:

Excessively overvalued equity markets

While global equity markets are in expensive territory, they are nowhere near the excess valuation levels that we have seen at previous market peaks, before a bear market starts. Our local share market is slightly different in that the peak valuation was more expensive than global markets, but a sharp correction has already happened to its valuation

Sharply rising short term interest rates globally

On the contrary, global short-term interest rates are still at absolute record lows, despite the fact that the USA may increase interest rates marginally sometime this year. Even if rates double this year in the USA, they will still be below 1% compared to somewhere above 4% in previous market peaks. In South Africa the situation is a little different. We will see higher interest rates because of domestic inflation caused by “administered” and other Rand related factors, but clearly NOT demand-driven inflation.

Sharply rising global long-term interest rates

Again, on the contrary, global long-term interest rates are at lifetime lows and are very unlikely to increase even marginally in the short term.

Rising global demand and inflation

Current fears are exactly the opposite: global growth concerns are about deflation and not inflation. Inflation will remain very low also for a while yet.

Economic catastrophe

The USA is sound; Europe is stable after the Greek crisis. The unknown is China and any country that supplies commodities to China. South Africa, Australia, Russia, Brazil etc are all very dependent on Chinese growth, so we can lump them all together for this discussion.

Nobody really knows at the moment exactly what is happening in China but I think that it is HIGHLY unlikely that the economy is in recession (or anything even close to this). A few outcomes are possible:

  • China is growing at 6% – I do not think that this is the case because the currency would not have devalued if growth was this high.
  • China is growing at between 4% to 5% – This is what is most likely happening and if I am right, world markets will be very relieved with this news.
  • China is growing at below 4%, but still growing. This is what the market thinks is happening and has discounted.
  • China is in RECESSION. This would be a catastrophe and expect more collapses is this is the case.

In my view, taking into account the above, we are NOT on the brink of a fully blown bear market. Not enough fundamental factors are present to warrant a bear market. Sure markets can fall more and we have not had any form of a correction in 8 years so it is overdue to a large extent. A correction is however NOT a bear market. I would estimate that at worst the correction would be 20%. Currently, the SA market is down 11%.

What to do now?

All my investment experience actually screams out to me that valuations are more reasonable now and investors should take the opportunity to BUY shares. Caution however dictates that a market crisis does not disappear in a day or a week and investors should be prudent in increasing equity exposure. I do not know where the bottom is for the market, BUT I think we are close and I will certainly be keeping a close eye on buying opportunities

Momentum Wealth Portfolios

In the funds that I manage, cash balances are the highest they have ever been in the funds and therefore these funds will definitely not be the worst affected by recent falls. I will start buying if/when market circumstances dictate so.


Surprisingly the Rand has by a long margin NOT the worst currency! This is a global issue. ANY currency that is related to commodity prices and volumes has been hammered. The Rand is in fact one of the best, along with the Australian Dollar. The Rand is severely undervalued at the moment, approaching the undervalued levels seen in 2002. So the Rand will strengthen again at some stage BUT it definitely needs much higher commodity prices before this will happen. Commodity prices are unlikely to start rising this year, but the worst of the fall seems to be over.

DO NOT PANIC I think that this is actually a buying opportunity at some stage. The turmoil is not however over yet, despite our market rising today!