Comment: Market Volatility

Following this week’s stockmarket volatility.

Key points:

Fundamental elements to market turmoil – sovereign debt concerns and weakening US growth
But we believe the past few days reflect investor panic rather than true prospects for global assets

There is a significant fundamental element behind the current market volatility, with European sovereigns facing very real problems and weaker economic data in the US undoubtedly threatening global growth. Market moves in the past few days, however, bear all the hallmarks of investor panic rather than a considered assessment of the true prospects for global assets. We believe that little has changed in the past week other than asset prices. It appears to be the falls in asset prices that is driving markets at present, rather than fundamentals. Investors are almost certainly being painfully reminded of the events of 2008.

3 Responses to “Comment: Market Volatility”

John Sturrock
6th August, 2011 at 3:23 pm

I wonder if this is accurate? The downgrading of the US credit rating by Standards and Poors is more than “investor panic”? It is well reported that the US is unlikely to be able to fund its massive deficit. Little may have changed in the past week other than widespread appreciation that the pretence that this can all be sorted has been exposed? Hubris has given way to reality? A report by a business professor in this morning’s Vancouver Sun suggests that the real crisis will hit the US in 2020 and that the deal last week will not solve the US debt crisis. Ten years from now is long enough to affect many people’s strategies. Maybe we need to look at things differently now?

Reply from Jock Encombe
7th August, 2011 at 11:43 am

The fundamental issue here is the long-term structural shift of wealth and power away from the developed West. Stock market valuations, which are heavily biased towards the West, are currently a long way from reflecting the economic reality today and future prospects on the ground In the same way that smart investors at the beginning of the 20th Century weighted their portfolios significantly in favour of the New World relative to the Old, so investors now need to do the same if they are not to significantly underperform. This of course has already happened in the commodities boom, which is in effect a play on China.

Reply from Duncan Glassey
8th August, 2011 at 1:07 pm

Jock I agree.
Debt crises, sovereign risks, double dips and banking strains: Page One headlines can make for depressing reading these days.

Standing back from all this, the picture that emerges of the world outside North America and southern Europe is of robust economic conditions. If anything, policymakers in many parts of the world, particularly in Asia, are seeking to pull back demand, rather than stoke it.

Australia, for instance, is enjoying its best terms of trade in more than 50 years. An unprecedented investment boom in mining is injecting extraordinary wealth into the economy and has helped to push the Australian dollar to levels not seen since it was floated in the early 1980s.

Likewise, China, India and much of South-East Asia are seeing strong investment flows and worrying more about over-heating than anything.

This is not to say that all is right with the world. The aftermath of the global financial crisis has created severe problems, particularly in terms of public sector debt and deficits. But we know that that news is in the price. Meanwhile, economic activity in much of the world is thriving.

The global economy is becoming multi-polar, rather than overly dependent on the US, which means the potential benefits from broad diversification are even greater.

Duncan R Glassey
Senior Partner – Wealthflow LLP

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