Slumping equities, commodities may continue, but not another GFC, fund managers say

Tuesday 25th August 2015

The biggest selloff in stock markets in at least four years, slumping commodity prices and a surge in Wall Street's fear gauge don't mean the world economy is heading for another global financial crisis, fund managers say.

New Zealand shares followed Wall Street and European equity markets lower for a second day, with the S&P/NZX 50 Index down 1.7 percent to 5510.82 in afternoon trading, on concern China's economy could be heading for a hard landing, potentially derailing global growth. A weaker than expected Chinese manufacturing gauge on Friday triggered the selloff on Friday which continued into this week, with the Shanghai Composite Index falling 5.8 percent today, adding to Monday's 8.5 percent plunge. The index has slumped 43 percent since reaching a seven-year high in early June.

Wall Street's fear gauge, the Chicago Board Options Exchange's Volatility Index, spiked to 40.74, the highest level since late 2011, though still below the 80.86 level it reached during the depths of the global financial crisis in 2008. The Thomson Reuters/Core Commodity CRB Index of 19 commonly traded commodities dropped 2.7 percent yesterday to the lowest level since 2002.

"Our view is that China isn't heading for a hard landing," said Keith Poore, head of investment strategy at AMP Capital Investors NZ . "The economy continues to grow and the authorities have ample fire power to prevent a downward spiral."

In the wake of the GFC, "the lesson of the last few years is not to panic during market corrections," he said. "The global economy continued to grow, monetary policy remained very loose and the global banking system was better capitalised compared to previous crises. Conditions are in place for the share market to recover."

More than $3 billion has been shaved off the value of the New Zealand stock market since Friday, pushing the NZX 50 to the lowest level this year. The relative strength index of the benchmark index dropped to 21 today, a level that chart watchers say means it is poised to rise. China is New Zealand's largest trading partner, worth $8.3 billion in exports in the 12 months ended June 30, while Chinese imports totalled $9.3 billion.

“China has been the engine of economic growth for the world and when China slows down it has an impact,” said Brian Gaynor, executive director at Milford Asset Management. “We are going to go through a difficult few months.”

Still, "it doesn’t appear to be a crisis. It’s nothing like it was in the global financial crisis,” Gaynor said.

Investors were already concerned about the health of the Chinese economy when the Bank of China devalued the yuan on Aug. 11 and allowed markets to have more of a say in setting its level against the US dollar. China's yuan has depreciated 3.1 percent since Aug. 10, and recently traded at 6.4029 per US dollar. Market volatility since then has also prompted some investors to dial back the expected timing of interest rate hikes by the Federal Reserve from next month to December or early 2016.

Federal Reserve Bank of Atlanta President Dennis Lockhart said on Monday that while he still expects the first interest-rate hike in nearly a decade this year, the outlook was complicated by a stronger greenback, a weaker Chinese yuan and falling oil prices, Bloomberg reported.

"Higher US rates were always a prime candidate for a [stock market] correction but given current volatility, the odds are now declining of a rate hike this year," AMP Capital's Poore said.

“Share market corrections can present buying opportunities for the more patient, long term investor," he said. "When there are too many sellers, shares must be sold at cheaper prices to bring buyers into the market.”

For the New Zealand market, stock-price valuations are now less elevated than at the start of the year. The NZX 50's price to earnings ratio is about 15.42 times, according to Reuters, down from about 21 times in February, when fund managers were saying the local market looked expensive.

BusinessDesk.co.nz

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