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7IM Market Update

Posted Monday, 24 August 2015, 12.42pm

Stockmarket mist clears...only to reveal an abyss


"A sea-change has taken place in the world’s stockmarkets. Having been seemingly fog-bound for most of the year, unable to find direction or make headway, they have succumbed to fear and panic. It’s natural for investors to want to understand why markets move, especially when the movement is large. Perhaps by understanding what has happened we can derive some information that will help us predict what will happen next. Regarding recent stockmarket turmoil, however, that may be a pointless exercise. The movements have been so rapid and extreme that they defy explanation. It is always tempting to imbue capital markets with a higher knowledge, to assume that they have some kind of predictive power that will materialise in a new economic reality. But it would be wrong.

What’s important now is our reaction, not the quest for an explanation. Our confidence in the rational behaviour of markets may have been shaken but our confidence in our investment process is intact. That process is telling us that stockmarkets are now cheaper, bond markets remain expensive but, crucially, the state of the world has barely changed. Such change as there has been, concerns Emerging Markets (EM) and, in particular, China. Two weeks ago China’s central bank spooked markets by devaluing the Chinese currency. The extent of the devaluation – a mere 4% – was not enough to cause much change in the economic landscape but the change of policy is important: China now has another tool in its arsenal for managing the economy. Markets seem to have taken this as implying that China’s economy is in a worse state than had been imagined. If that is the case, further devaluations may occur. We do not know when or how much - the People’s Bank of China is not accustomed to sharing information, and that creates uncertainty."

Chris Darbyshire, Chief Investment Officer, Seven Investment Management

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