Correction or Crisis?

Matthew shares his own views on recent market volatility:

The well known trading adage, “Sell in May and go away” has rarely been more pertinent; since 27th April the FTSE100 has fallen 13% amid fears of US interest rate rises and a clear slowdown in the rate of economic growth in China.


This begs the question as to whether this is simply a normal and predictable market correction or the first tremors of something more sinister looming over the horizon.


An exploration of the underlying issues triggering this sell off would imply that this is indeed a correction within a continuing bull market that has been with us since the turmoil of the banking crisis of 2008.


Markets never like uncertainty, a slow down in economic growth in China is hardly a surprise despite continued and significant growth in excess of 6% this year, albeit short of Chinese government forecasts of 7%.


Western recovery has been driven in part by huge demand for commodities, goods and services from the world’s second largest economy, in return China has provided cheap manufactured goods helping us to avoid the spectre of inflation, keep interest rates low, and stimulate our own damaged economies.


What is becoming increasingly obvious is that this position is not sustainable in the longer term, commodity prices have fallen significantly, specifically for oil and steel as demand from the East is falling.


There are also significant question marks as to the reliability of the data coming out of China which is, after all, a totalitarian state. This has the short term advantage of being able to generate government driven growth through massive infrastructure projects.


A less positive aspect of this type of state planning is the propensity for sanctioning ‘white elephant’ projects driven by government spending to address an insatiable appetite for industrial growth and urbanisation.


The theory is that this then stimulates economic development, a more educated and sophisticated work force and a corresponding demand for consumer goods to promote sustainable domestic growth and development.


Short term economic news from China is disappointing; manufacturing output in China has declined significantly in line with overall growth but arguably this is an inevitable consequence of a more mature economy.


Retail sales are growing significantly, together with air passenger numbers, house prices, cinema receipts and mobile phone contracts. Perhaps the changing nature of Chinese economic development may yet prove to be a as much an opportunity for western goods and services as any short term slow down proves to be a threat to global stock markets.


China is certainly having an effect on the timing of US interest rate rises which in turn has created uncertainty and spooked stock markets in the US, UK and Europe.


Nevertheless the fundamental drivers of growth have changed little in the past 12 months; in the UK we remain in a stage of recovery with opportunities for growth driven by a strong UK consumer who is enjoying low interest rates, low fuel prices and the first signs of genuine wage increases.


The UK stock market does not look cheap but equally it is not over priced and future expectations for growth both domestically and in continental Europe would imply that the present bull market still has some way to go.