Investment Directors' Bulletin (September 2015)Contributors Edmund Brandt, Edward Walker
Global equity markets took a heavy hit at the end of August as investors worried about the negative impact of a potential Chinese slowdown on growth in Europe, Asia and America.
In the last two weeks of August, global equity markets took a brutal beating. The MSCI World Index finished the month down by a painful 6.6% in local currency terms. There was nowhere to hide: all major regions fell heavily, with the MSCI US Index down 6.1%, the MSCI Europe Ex UK correcting by -7.8%, the MSCI Japan off by -7.9% and the MSCI Emerging Markets down 6.5%. This market turbulence was led by the combination of renminbi devaluation and poor Chinese manufacturing data, which triggered fears of an approaching hard economic landing. Fears of weak Chinese second-half GDP growth in turn negatively affected commodity prices, other Asian currencies and investors’ expectations of US interest rate increases. These concerns resulted in a weaker US dollar vs. the yen and euro.
The scale of stock market volatility took many investors by surprise. The Chicago Board Options Exchange’s VIX index of volatility is a good gauge of investors’ anxiety and fear. Having closed on 19/8 at a level of 15, the index aggressively spiked to 41 on 24/8, amid brutal intra-day price moves across the major stock markets. Next, an interest rate cut combined with a CNY 150 billion liquidity infusion by the People’s Bank of China (PBoC), better-than-forecast second quarter US GDP growth and strong European data led markets to rebound and the VIX to oscillate widely, finishing August at a still elevated 31. Investors’ fundamental fear remains that a potentially damaging slowdown in the world’s second-largest economy, combined with continued currency volatility, will mean that slower Chinese demand harms growth in Europe, Asia and America.
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