We have been through a number of downward moves over the last 7 years since the big crash in 2007, and in all cases they were understandable.
There was the Euro crisis when a breakup of the single currency was thought to be possible; it didn’t, and markets rebounded.
The US caused markets to fall with the political in-fighting over raising or refusing to raise the debt ceiling; they finally did and markets recovered.
This time though there is no single issue, no one factor that when sorted will return everything to normal. Rather over the last year a number of individually smaller potential areas of concern have emerged which appear now to have coalesced, causing markets to collectively go into full panic mode.
Areas of worry
Oil
The root problem for oil prices is twofold.
The first is that the Saudis have decided to produce more product than the world needs, of course this is not in itself exactly their responsibility to moderate their own production to keep supply/demand in balance, it’s just that this is what they have previously done.
There is a much bigger political picture to understand as well, which involves the long term relationship between the US and Saudi Arabia which has recently changed with the US becoming energy independent and their lifting of the embargo on Iran to export oil.
The second is that speculation on commodity prices will load on to an established trend, so a falling oil price has meant greater shorting of future oil prices which creates further downward pressure until the trend breaks.
Oil will find a base level and it will stabilise and probably rise somewhat from artificially low levels but as with all investments the devil is in the ‘when’?
Sovereign Wealth Funds
These are the funds built up by the big oil producing countries in their days of plenty, they are now aggressively being liquidated to fund shortfalls in their oil income to meet their domestic budgets.
This is especially important for a country like Saudi Arabia which has increased social spending enormously to keep their citizens happy and to avoid any Arab Spring type event.
This has put huge selling pressure onto markets and has probably exacerbated the falls, particularly in areas they are known to have owned significantly such as bank shares.
China
Put simply – no one truly knows what’s going on, it’s certainly slowing but by how much? They certainly have issues but how big?
Is their banking system ok, is the government in control, will they devalue the Yuan more?
Some facts
The above issues are real but so are the following facts:
The US GDP is growing by around 2-2.5%
The employment rate is low
Real wages are growing
Consumer confidence is strong
Lower oil prices are a massive boost to real spendable income the world over
The U.K. is also doing OK, as is the US; Europe is plodding along ok
The banks are well capitalised compared to 2007/8; there is simply no comparison and no reason for their health or ability to withstand a downturn to be seriously questioned
China has huge reserves to sort out problems
The major oil producers only need to agree an across the board cut of say 5% of production and equilibrium is restored
Conclusion
It would appear currently that fear is causing more fear.
The most asked question we are hearing is, ‘what am I missing, what’s at the root of this?’
Maybe that’s a problem in itself; it’s the lack of any main issue that is spooking people.
There are, as far as we can see, no major problems. There are real difficulties, and there always will be but there’s nothing seminal that warrants Lloyds Bank being down by 30% in a few weeks.
It’s a horrid time and hugely uncomfortable for everyone, but it’s why successful long term investing is as much about staying the course through the rough patches as it is brilliant stock selection.
Sometimes it’s just bloody and it hurts but we must not allow emotion to cause us to be shaken out at the bottom. This is a time to look to carefully add; “this is the time to be greedy when others are fearful”, but boy oh boy it’s tough to do.
It’s worth reading this article from the Independent – “Don’t panic! At least not yet – it’s time to take the long view on equities vs bonds”
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.