Staring at the bear

The market is tumbling and at Eureka Report we’re not selling. Here’s an upbeat read from Adam Carr, a gloomier read from economist Ken Courtis and a pragmatic take from Marcus Padley. (Also on video Alan Kohler and James Kirby.)

Alan Kohler and James Kirby's Inside Line video today:

Adam Carr (Eureka Report economic strategist) writes:

Well. What to say about that? Today’s fall on the S&P/ASX200 of 4.09 per cent is the worst daily fall since January 2009. Adding to the drama, the Shanghai Composite fell 8.1 per cent and has now lost around 38 per cent since its mid-June peak.

So what’s driving it? Panic – pure and simple. Try as people might to pin some sort of fundamental rationale on the price action – I honestly just can’t see it.

I realise that much of the commentary we read and hear is about is on the global growth slowdown - and it’s all doom and gloom. 

The problem is that there isn’t a lot of support for that view. Price action alone is not sufficient – because we know markets are bid up and sell down – sometimes for no apparent reason.

Just look at the Chinese stock market – on the way up and down! That’s what we’re seeing now in my view. Huge market gyrations driven by fear mixed in with some disappointing data and confusing price action.

Concerns over China, as I‘ve explained for some time now (see Property v shares: The 2016 scenario, August 19), are over-done. That’s not to say China isn’t slowing – it is. This is largely by design though and the fact remains that Chinese growth rates are still very strong.

Most importantly if there was any real trouble, if the Chinese authorities were worried about growth in any fashion, they would simply launch a major fiscal stimulus program and if necessary, finance it by printing money. That they aren’t doing this speaks volumes.

Realistically, the market has just been hit with some bizarre price action on the yuan (see Who’s afraid of a falling yuan?, August 17) and Chinese equities, together with a commodities rout that is actually a major stimulus for global growth.

Personally then, I view this as one of the best buying opportunities in years. I’m fully aware that my boss Alan Kohler and many others would have a more cautious view – and that’s fair enough. (Alan’s video with James Kirby today is above.)

The way I look at it though – there is nothing to suggest markets won’t punch up 10 per cent in short order – if say the Fed doesn’t hike (meeting in three to four weeks), or does hike in smaller increments, say 0.1 per cent or some such… It wouldn’t take much.

For income buyers you are seeing some of the best yields in years – it’s easy to find grossed up yields, safe yields, up around 8 to 9 per cent. For those investing for growth – it’s similarly a smorgasbord of opportunity for long-term investors. That's not to say that this – 5000 on the ASX – is the bottom  There could be another 10 per cent downside from here. Or not. 

It's more a question of what's more likely over time. 

Ken Courtis (economist and former Goldman Sachs Asia vice chairman) writes:

I expect to see further downward revisions of expectations for the year as we move into the autumn.

Asian economies, while performing substantially better than the rest of the world, are slowing versus expectations, with the exceptions of Vietnam and India.

For the rest of the year, US economic performance and timing of the next phase of US monetary policy, and China are the focus. In the EU, Germany and the UK are performing moderately well, but the eurozone continues to face challenges, many self-inflicted.

Also working to shape the performance in the months ahead will be the behaviour of commodity prices, particularly of energy, the resolution – if any – of the inflation/deflation dynamic and related policy debate, and how the still building private and public sector debt loads around the world are managed. 

I will focus here on what I see as are the three most important economic issues shaping the remainder of 2015 and into 2016.

1. US

The performance of the US economy continues to be mediocre, as it has been for most of the recovery. There is little sign that this state of affairs is about to change, indeed if anything there is softening bias developing, particularly in manufacturing.

While the underlying strengths of the US economy remain considerable, the dynamic shaping the current mediocre performance are unlikely to change anytime soon, which means growth continuing in the 2-2.2 per cent range.

2. China

Stronger numbers in the first half for the overall economy, at 7 per cent, surprised many, although it was right on the number that we had been expecting. 

It may well be that in later revisions the 7 per cent number will be revised downward some. But it is also the case that the structure of the Chinese economy is changing, and changing probably faster than many yet see.

3. Commodities

While there are many factors which drive commodity prices, the fundamentals of demand and supply continue to take prices lower, particularly industrial commodities. For a decade capacity was put in place for 6 per cent plus global growth. But we are now living in a decade of 3 per cent global growth. 

*This is an edited version of Ken Courtis’ commentary.

Marcus Padley (stockbroker) writes:

If you want to sell… sell. My message is this: No-one knows if this is a momentary loss of composure or the beginning of the end but I’m not hanging around to find out. As that TV ad says, the ship is safer in the harbour but it is not what ships are designed for. Yes... but there are times when the ship is safer in the harbour.

It is hard to sell now but this is ‘the moment’ to make the decision because it could get very ugly. And we don’t need to join the throng of advisers and commentators spouting unfounded wisdom with our fingers crossed behind our backs. 

We are not flinching in banks, infrastructure/utilities and income stocks (defensive stocks) but we will be pruning some growth stocks from our Top 50 and Growth portfolios as a precaution today.

*This is an edited version of the Marcus Today newsletter.

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