China Comment

It is early to say what the impact of the fairly thumping market setbacks may be, and indeed whether we may see more of the same, however, I hope the following is of help in adding to your picture of the markets:

The obvious cause of the market set-back appears to be a statement from the Chinese authorities concerning, on the surface at least, the sustainability of the existing growth trajectory, and therefore the outlook for the value of their domestic currency. China has a reputation for manhandling currency sentiment in order to try to prevent the overt inflow of 'hot money' into the currency, which is potentially destabilising.

The reality, in our view, is that possibly only a modest medium-term threat exists from this source and that China has simply tried (and succeeded) to panic global markets into short term submission, which allows China, in turn, to take advantage of a variety of short term anomalous market opportunities.

In our (humble) view, China has learnt to manipulate Western capitalism in an almost poetic fashion; but the real outlook remains optimistic for the global economy, with quite a soft landing for the US looking quite likely at this early stage.

The impact of China's ripples could be to de-stabilise risk appetite globally, but given the reasonable fundamentals it is likely that this phase of destabilisation should be relatively short-lived.

Asset prices will likely move in tandem for a time, before the inevitable realisation that equities will reassert themselves as the asset class of superior value for the time being. This could be an inflexion point for bonds this year, with the possibility of another sharp move down in capital values, though structural demand for the asset class is likely to remain strong and limit any severe correction.

In the meantime our message is that KMG's clients should be well placed having highly-diversified portfolios to weather this setback. In our view the global economy is shaping up well for just a gentle mid-cycle slowdown, rather than any more precipitous outcome - at this stage.

We will of course continue to monitor events closely and do anticipate a strong bounce-back from equities, even if the setback proves longer and more substantial than it appears at present.