Investment View Q4 2015
Headwinds and Uncertainties. The psychology of financial markets has markedly changed since April, with most investors turning anxious or even fearful going into the last quarter of 2015.
Firstly, worries were fuelled by the persistent news of China’s economic contraction leading to a huge stock market plunge in China and elsewhere. The unsuccessful (and unusual) measures by China’s government to prevent the falling markets and the ill-timed devaluation of the Renminbi added to investors’ worries about the leadership’s capabilities to lead the country through change.
Secondly, following the devaluation of the Renminbi, Asian currencies sold-off over worries about potential new currency wars. Currency devaluations were also manifest in commodity producing countries, like Brazil (BRL/USD -22%) and South Africa (SAR/USD -12%). The slowdown in China, the world’s biggest importer of many raw materials, has pummeled commodity prices and weighed on global trade.
Thirdly, the sharp drop in the price of oil is the result of over-supply. Major producers such as the Saudis, Russia and the USA continue to produce more oil and gas than demand. Excess supply of oil has led to a dramatic downward spiral of oil prices. The supply of oil will even increase should Iran join the club of major oil exporting nations. Given these circumstances, expenditures by oil companies are being sharply reduced. These expenditures are an important source of future income for many industrial companies. Long term commitments to explore new fields are being revised. Some USA shale gas producers – which could make the USA energy fully independent – are even facing bankruptcies potentially impacting banks and suppliers.
Fourthly, the decision by the Fed on 17th of September to keep interest rates unchanged confused investors about the Fed’s intentions and objectives. Initially equities rallied. But then the underlying message – that the Fed worries about a global growth shock and unconvinced about US economic strength – caused the markets to correct (“prudent risk management around current market volatility” Atlanta President Lockhart).
The Fed’s decision poses the intriguing question about the possibility if Chair Yellen is worried that inflation may not reach its target (2%) for years or that the US economy is weaker than most believe despite a falling unemployment rate.
Finally, the USA emissions scandal engulfing Volkswagen AG with accusations of cheating on US emission tests is very bad news for “made in Germany” and for the DAX, the main German stock exchange. This scandal cannot be explained and will leave a mark on German’s industry, but it should recover and could be the start of investments alternatives besides diesel.