Here is one to restore your confidence and a feeling of safety. You wouldn’t drive without a seatbelt, would you? Especially when you’re driving on a bumpy road. That’s why I got annoyed at Martin Wolf of Financial Times. He got me so annoyed in fact that, despite my firm resolution not to comment on the markets’ performance, I am breaking my resolution.
Considered widely the most influential English language financial journalist, Wolf, who is a leading FT business commentator, screams in his headline that China faces ‘discontinuation’ in economic growth, a phenomenon familiar from other developing economies. He refers to something called total social financing, which in 2014 reached 194% of China’s GDP, and says that the International Monetary Fund predicts that ‘without reform China’s GDP will gradually slow down to 5%.’ He concludes with a startling revelation: China’s economic system may not be compatible with the Chinese political elites, ever more bent on centralising political power.
I could think of a worse time for springing such a downbeat assessment on us than a week after China’s black Monday. I could also think of a better time for Goldman Sachs to bring us new, less optimistic forecasts for China’s economy: 6.4% in 2016, 6.1% in 2017 and 5.8% in 2018 from the original 6.7%, 6.5% and 6.2% respectively. One is not exactly inspired either by Goldman’s forecast for the current year (2015), which is said to remain unchanged at 6.8%. Why should it be cause for concern? Because it’s a lot less than the 7.4% growth in 2014.
Still, I am annoyed with opinions saying that it is not entirely clear why investors are running scared. Is it the slow-down of China’s economy or perhaps the financial markets being taken off the drip by America’s FED which has hitherto pumped them full of cheap dollars (which may happen if the FED believes inflation is imminent)?
And at home? Do the fears centre on the outflow of capital from developing economies? And who is actually afraid? The two-year WIG20 shows a fall of more than 10% over the last 24 months. But mWIG40 tells a different story: a more than 15% rise over the same 24-month period. Despite wild fluctuations, there has been an uptick also in sWIG80, the index which tracks the performance of the smallest companies on the GPW (the Warsaw Stock Exchange): more than 2% in the past two years. It appears then that the fear has gripped mainly foreign investors who go into or pull out of developing markets in response to ever new global fears.
A glance at the złoty exchange rate and a similar story emerges: over the last two years the złoty first held firm against the euro, it then strengthened (from 20 January to nearly the end of April), only to start sliding on the wave of fears over developing countries’ economies. And since the slide started, at 3.98 to the euro on the Interbank market, it has now reached a level of 4.24 to the euro. Disaster? No. On 5 September 2013 one euro was trading at 4.27 złotys, and on 26 December 2014 at as much as 4.36 złotys. I am not concerned here with the dollar rate – it’s a question of the euro-dollar movement rather than the evaluation or valuation of the Polish economy.
What I am driving at? Well, if somebody got into a mountain cable car, they’d better fasten the seatbelts. It will help them to relax as they watch the car alternately rise and fall. Of course, not everyone invests in the value of companies for the long term (long is several years). Some investors are simply in for the gamble. Unfortunately, there are also those who put too much trust in the governments of different countries (I am not pointing my finger at anyone in the interests of maintaining good relationships). Even though they should exercise maximum caution, they succumb to the temptation of turning in a quick profit and risk too much, at the expense of their life savings or the security of their personal assets. It is those investors that suffer most on days like China’s black Monday. I feel for them deeply. Apart from this, nothing is happening, in my view. Just a correction. Only a bit more painful this time.
It’s another question altogether how to prepare for what is still ahead of us. That we are in for a rough ride is beyond doubt. It would appear that the entire economies, not just markets, are going through faster economic cycles and, unfortunately (or perhaps fortunately?) the shock waves come at varying frequencies (whether in the US, Europe, South America or Asia). So, how to withstand them? My answer: bring in an iron investor discipline:
- Set a figure for how much you want to earn on a particular investment instrument.
- Have you made your profit? Monetize (or cash in your investment, in financial slang), that is sell! Don’t make bets on when the next investment bubble will burst.
- Have you lost? Sell! Don’t wait until you’ve lost more.
That’s all and that’s enough. Emotions – switch off. Thinking – switch on.
That is also why I am so surprised at the media’s reaction and at the FT’s and Martin Wolf’s in particular.
A typical western investor’s approach is also evident in this CNBC.com article:
To calm down, you may want to look at the graphs on Onet, Wirtualna Polska, Interia or any other internet information service. Just be sure that, as in the example below, you look at a period of two years, or else you’ll miss the bigger picture: