Here is a quick view of my thoughts on China and why I am not overly concerned by it.
China is now the World’s second largest Economy in terms of GDP and as such obviously has a large impact on Global GDP Growth. A Slowdown in China will drag on Global Growth but it will not have the impact that it might have had 4 or 5 years ago when the rest of the World was really in a mess following the Credit Crunch. That situation is very different now, the US and the UK are firing on all cylinders and after a difficult period in recent years, even Europe is starting to perk up.
It is worth realizing that China is only suffering a Slowdown, not a Full blown Recession. It is a good narrative for the likes of CNBC and Bloomberg to use though to explain the recent Drops in the Market - my view is that these falls and Volatility are more due to the usual Seasonal Factors (“Sell in May and go away and don’t bother coming back to your Desk until October“) and low Trading Volumes as many Market Participants are away on their Holidays. Lower Trading Volumes always means higher volatility and crazy swings (think of how you get such daft moves and Choppiness in tiny Illiquid AIM Stocks where there are very low trading volumes - it is exactly the same concept).
A positive side-effect of the Chinese Slowdown for Western Economies is the drop in the Oil Price - it is like every Citizen in the West getting a huge Tax Cut. People will not be shoving so many Tenners into their Petrol Tanks and this is money freed up to spend on other things like Beer, Eating Out, New Dresses, New Shoes, New Electronic Gadgets etc. This is also keeping Inflation down and this will mean that Central Banks have even less need to put up Interest Rates - another boost for Western Consumers.
The Slump in other Commodities like Copper, Aluminium and Iron Ore gives a lowering of Input Costs for all sorts of Western Manufacturing Companies like Car Makers and Washing Machine Makers etc. This keeps Prices down and again boosts the End Consumer giving them more Spending Power. In addition, the Big Devaluation of the Chinese Renminbi means that Imports to the West from China are cheaper - more power to the Consumer.
On the downside for Investors, China and all Emerging Markets (mainly due to their Economies relying on Commodities) will suffer - so these areas are best avoided. Chris Dillow the Economics guy in the Investors Chronicle, made the point recently that Japan, Emerging Markets and Commodities themselves have very high correlations - so people who think they are diversified across these Assets Types may be wrong. It is worth thinking about this - I am sure Readers know I think Japan is a ridiculous place to ‘Invest’ in.
US Rate Rise
While we’re on the subject of Macroeconomic worries, I might as well say a little bit on impending Interest Rate Rises in the US.
There is quite frankly a ridiculous amount of attention paid to this issue with regard to when the Federal Reserve will start raising Rates. This is all great talking points for CNBC and Bloomberg and all the assorted ‘Experts’ but listening to this nonsense is a total waste of time for Long Term Investors.
Day Traders and Short Term Position Traders may find it a source of Profits to trade around Fed Members talking publicly or various Economic Reports such as US Money Supply, Purchasing Managers Indexes, ADP Jobs Numbers (whatever they are) etc. - but to Long Term Investors it means the square root of sod all.
What Long Termers need to know is that when Interest Rates rise Stockmarkets historically do very well - and certain Sectors such as Banks benefit hugely. This is because the Negative aspects of a Rate Rise are more than outweighed by the Positive aspect that an Environment within which Central Banks are prepared to Raise Rates is one that is Booming and very good for Businesses and Demand. This effect holds true until Interest Rates reach levels like 5% or so in the UK - although this level may be reduced for various reasons and perhaps is more like 3 to 4% now - but that is a long way away from where Interest Rates are now and rises are likely to be very slow.
Banks benefit because their Lending Margins increase - simply put, if the Central Bank raises rates by perhaps 0.5%, the Banks will increase the cost of their Loans by perhaps 0.7%.
Investors need not view Rate Rises as a Negative - in reality they indicate an Economy that is returning to more ‘Normal’ conditions after the appalling damage that the Credit Crunch inflicted on the Economy’s ability to function effectively. So we should all calm down and stop listening to the Bearish Casandras.
I just wanted to bung in a few Paragraphs on my current Strategy. I have been Twittering a fair bit about this but I know many Readers are not on Twitter and it seems sensible to get some words on the Website.
After the awful pain at the end of last week, especially on Friday and the utterly horrific day we endured on Monday (watch this space, there is a Blog or two coming out on this in the coming week) and the Low Trading Volumes and inherent Volatility over the Summer Months and leading into Autumn, my current stance is to be very cautious. I have not been buying individual Stocks this week but of course I closed the Chunky FTSE100 Short Hedge that I had on Monday Night - so in effect I have actually done a Massive Buy this week.
I expect Markets to do quite well for a bit - maybe the FTSE100 can get a bit higher before we lead into Autumn - so I will be watching the Charts very closely and I am really looking to put another Short Position on before we get too deeply into September and October.
These are historically 2 of the worst Months of the Year (September is the worst) and most years we get an Autumn Selloff - and it is often quite nasty. There is a School of Thought that the Huge Drop we had this Week will mean we avoid an Autumn Selloff and this might be correct - but I still think it is best to position myself in case there is a Selloff. My hunch is that we will get an Autumn Drop probably in October and we will revisit the Lows that we put in on Monday 24th August.
I will not be rushing to put a Short on but I will be reading the Charts carefully and looking for clear Signals that it is time to be Selling. The Kind of things that will particularly flag to me that it could be time will be the RSI on the Major Indexes getting up around maybe 65 ish and if we get a strong push upwards which starts to look overstretched. I will probably put a Small Short on first and gradually build it up depending on how things play out. I will be looking to Sell any Stocks that I want to dump or if they run up and get overvalued. In the main I am very happy with my Stocks and would like to keep them through any Selloff - this is a big beauty of Hedging in that it means I don’t need to sell my Stocks to reduce Risk.
Ideally, we will get an Autumn Selloff and I can make Big Money on any such drop - my Recent Shorts worked very well and I banked a lot of Profit but I was too light and I think I need double the size of Position. I will try and achieve this with future Shorts and I probably need about 40% of my Long Portfolio Hedged via FTSE100 Shorts (Spreadbets and/or XUKS ETF) - my recent Short was about 25%.
Following such a Drop (if it happens, it might not - but anyway we often get some slack in November) I will be then looking to Buy Heavily in advance of Winter - this is the Best Time of the Year for Stocks and I want to max out on it as much as I can. I expect to be increasing my Leverage via Spreadbets a fair bit.
On all these Issues it’s important to realise that Markets move first and then the Media Narrative follows - people in general do not realise this - don’t be caught in their Bullish and Bearish Traps. Note how the Mainstream Media with the likes of the BBC and Tabloid Headlines only picked up on the latest Stockmarket Panic just as it was time to Buy - huge Buy Signal.
So, that’s my view on stuff, you of course may totally disagree. No worries, at least I have probably got you thinking !!
Good Luck for the Weeks ahead, wd
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