And here we go again
02 February, 2016
Welcome back ... we've missed you. If you haven't checked in during January, don't worry, you haven't missed much. There's been some volatility and some scary headlines and attention-grabbing forecasts. And the dreaded R-word reappeared as a sharp drop in world markets over several consecutive days prompted commentators to think a US recession might be on the cards. Other than that, it was just another rocky start to a year, coinciding with a slow news period.
I am of course playing down the events of recent weeks, only because there was nothing really new to have prompted the market to fall dramatically, and there is not too much to read into the market gyrations. At times like this, perspective can be very helpful, because sensational headlines can drive us to make hasty, and often incorrect decisions.
In our December newsletter we summarised the key topics that have influenced market direction and investor behaviour throughout 2014 and 2015. These same issues were cited in the early tumultuous trading days of this year: China's growth, US interest rate hikes, the US economy and commodity prices. The two that took centre stage in January were China's growth — data released during the month confirmed slower economic growth but still broadly within the expected range — and commodity prices, with the oil price in particular taking a tumble due to a global oversupply.
Individually, none of these factors was big enough to provide a convincing explanation. Even though China is a significant contributor to global growth, if it turns out that the Chinese economy grows by 6.5% rather than the forecast 7.0%, we will not automatically experience a global recession. None of the developed economies are so dependent on China as to be impacted by a gradual slowing of its growth rate.
As for a falling oil price, it clearly causes misery in the energy sector and in oil producing countries, and for those investors who have an exposure to investments or debt in the oil and gas industry (and this has been a popular hunting ground in recent years), but it doesn't automatically spell recession. Indeed, as Mark highlights later in this newsletter, there are lots of beneficiaries of a lower oil price, including anybody who drives a car and any businesses that pay for fuel.
The market acted as it did in January because of a change in sentiment, triggered by goodness knows what. There was something of a snowball effect as investors increasingly viewed low commodity prices and a Chinese slowdown as a signal of something ominous. The world needs inflation — central banks have for several years been using interest rates to engineer inflation, or rising prices, in order to achieve economic growth. Falling commodity prices and slower demand from China don't exactly help in this regard. This newly cautious 'risk-off' sentiment may prevail for weeks or months into 2016. It may result in 2016 being a less than stellar year for investors. These things happen from time to time.
As we said in December, nothing that has happened in the last six weeks should have affected your goals, time horizon, cash flow needs or your long-term investment plan. What has been affected is the opportunity set. Lower prices mean better value and higher future expected returns. So in many ways, the longer that asset prices stay lower while we are saving and investing, the better for us … even though it may not feel like it at the time.
If you need statistics to reassure you, here's a goodie: There have been 20 market selloffs of equal or greater magnitude in the last 40+ years. Only in three of them was the market lower 12 months later.