Views

Why We Are Optimistic

4th September 2015

Unless you spent the last weeks of August languishing on a remote island, disconnected from the world (which some of you actually might have been), you are aware of the recent spike in market volatility as evidenced by the VIX (S&P Volatility Index) reaching over 40 on August 24th – 300% higher from the week earlier.

As market movements and potential causes are quite well covered by media, we want to take a moment to share with you several reasons why we remain optimistic.

First, we have to look at China. Equity markets there have experienced a large correction, with the Shanghai Composite closing yesterday down 39% from its high in June. Economic growth is decelerating, and the recent Purchasing Managers Index reading suggested a slowdown in manufacturing activity. The property market has experienced varying degrees of price corrections, and certain local governments are heavily indebted.

Nonetheless, our view on China remains “glass half full.” Economic growth remains well in positive territory, with retail sales continuing to grow at or near double-digit rates. Negative “wealth effects” from the correction in equities will be limited: despite the recent dip, year-to-date the Shanghai Composite is down only 2%. Finally, while local governments may be strapped for cash, the central government has a huge war chest remaining. Rest assured, they will use it as necessary.

Second, while the oil price correction is currently wreaking havoc in the over $1 trillion energy debt markets, over the medium term it should prove to be a massive form of stimulus, equivalent to a historic cut in tax rates. As gas prices continue to drop to 11-year lows going into Labor Day weekend, U.S. consumers have already saved $65 billion on gasoline in the first half of 2015 alone.

Third, and perhaps most importantly, developed economies remain on solid footing. While investors seem intensely focused on the timing of the Fed rate hike, all central bankers are acutely aware of the risks to the global economy. None of them are asleep at the wheel.

Finally, we are optimistic because we can be. We have always placed an emphasis on being well diversified, and in this environment that philosophy means that we have flexibility to increase our exposure to “market driven” assets without taking undue risks. We are not adept market timers, but we are keen to take the opportunity to be, as Warren Buffet might say, “greedy when others are fearful.”