Are we embarking on the great reset of global markets or is this just a normal rebalancing in the life cycle of markets?
There are experts justifying both camps and of course, given enough time, both can be correct.
The greatest challenge for all investors and traders is that the future is not guaranteed, but we can get paralysed by what might happen as opposed to what is actually happening.
The theme of China’s growth slowing is of course a concern.
However, we must adapt to change – like our readjustment from the mining investment phase of our domestic economy, there are new phases and challenges that we all must face.
The major underlying concern for China’s economy and equity markets is that they fall back to old habits – intervening and manipulating rather than reforming and streamlining.
With the recent “intervention” in the local equity market to prevent further declines, governance sent shockwaves to external investors.
In response, there has been a retreat of funds from emerging markets on the whole.
Capital seeks two main tenants in its placement, returns and safety.
Different people will rank them in a different order but ultimately there is a requirement for both.
If China can steady the ship and restore confidence, capital will again flow into China.
Context is everything and we see in the line chart below that the broader China Market index is still holding above its 2015 lows.
China will continue its path to global economic powerhouse - that story is not changing.
That being said, markets don’t have to rebound.
They can continue sideways or move lower, so having a “what if” strategy is important.
The other dominant factor will be the US Fed and the next steps in takes in either raising or holding rates.
The next meeting is due later this week and will be a real test for the remainder of 2015 and beyond.
The US economy could be a catalyst to refire the global economy, however, there are varying indicators of how strong it actually is, and whether it can withstand a rate rise.
In comparison to the GFC in 2008, the general economic conditions in 2015 don’t feel as dire or worrying.
Yet, if you look at interest rates they are the same.
Global markets are suffering a confidence problem, on top of excess debt of course.
Charting a path forward from here will likely be less about policy settings and more about the belief of market participants in what the future holds.
As I have discussed previously, home bias to our local stock market has meant a lack of exposure to international stock markets.
Even though the US markets have also fallen recently they have not experienced the same decline as China.
Additionally, the lost ground on our Aussie dollar compared to US dollars has had an overall short term effect of reducing losses on any US stocks held.
So are we starting a rebalance or a reset?
Both require a plan of attack and active decision making.
A rebalance could be followed by a prolonged sideways market until confidence returns.
This can be a healthy thing for markets as they can refuel for the next up move.
If recent moves are a market reset we won’t know till after it’s happened, so a review of your asset allocation is likely overdue.
Make plans on how important safety and returns are.
As investors we have tools and products to allow us to match our outlook, in future articles I will look at the role that inverse ETFs play if you are bearish the markets but don’t want to close out your exposure to stocks all together.