September Market Comment – Tricky Times

China is proving slow to go away as a perceived problem for investors. While the shock announcement of its, admittedly modest, currency devaluation against the US dollar did not produce the mayhem in foreign exchange markets many feared, worries over the extent of the slowdown taking place in the world’s second largest economy continue to undermine sentiment. Life may have become a little calmer of late, but there remains much speculation over the extent of the Chinese slowdown.

Elsewhere news continues to be mixed. Unemployment numbers in the United States came in at a seven year low, though the increase in the number of jobs was lower than expected, adding to the uncertainty over when the Federal Reserve Bank will put up interest rates. In Europe most media attention has been focussed on the growing migrant crisis, but a downturn in export orders for Germany’s manufacturing sector underlined the weakening demand from China and other emerging nations. The ECB has warned of the sluggish nature of the economic recovery in the euro zone, so a loose monetary policy looks likely to remain in place.

But to return to China, it should hardly come as a surprise that the economy there is slowing. They coped with the recession ushered in by the financial crisis of 2008 by switching focus to much needed infrastructure spending. There is only so much a country can do in terms of building roads, creating high speed rail links and introducing new, million population plus cities. And, of course, the industrialisation of the country is a once in a generation exercise, now largely complete.

What is more of a worry is the way in which China and many other emerging nations have built up the level of debt they have to service. With important countries like Russia and Brazil facing recessionary conditions, the once vaunted new growth centres of the global economy are facing a tougher future than many anticipated. Little wonder investors have been deserting these markets in droves. The extent of the disenchantment with emerging markets is demonstrated by the withdrawal of more than a trillion dollars worth of investment from funds targeting this sector since the end of 2013.

To return to our domestic market, which has managed to shrug aside softer conditions in Asian markets recently, it has yet to make up much of the ground lost earlier. The FTSE 100 Share Index did sink below 6000 in the volatile trading that has followed the announcement of the Chinese devaluation, but buyers have been attracted into the market at such levels. Professional managers, too, are pointing to value returning to some sectors. Perhaps conditions can now be allowed to settle down, but it remains a tricky time for investors.

Brian Tora, who is a respected writer and broadcaster on investment issues, is a consultant to JM Finn & Co. Brian has enjoyed a long and distinguished career in the City. Any opinions expressed are his own and should not be construed as advice from JM Finn & Co. A version of this article may appear elsewhere in the press