• Global equity markets had a torrid time during August driven by thin trading and concerns that Chinese growth would be lower than estimates
• Global commodity prices have been severely impacted by the potential for a significant slowdown in China
• The UK’s economic growth is currently strong
“Global equity markets had a torrid time during August driven by thin trading and several indicators fuelling concerns that Chinese growth would be lower than official estimates. Investors have been concerned with falling factory gate prices indicating excess capacity and the potential knock-on effects on global commodity prices. In addition, the rapid rise of China’s debt from $7tn to $28tn over the last seven years has the potential to cause further problems.
“The Shanghai Composite Index’s losing streak started in June, declining 38% in local currency terms to the end of August despite Chinese authorities spending around $200tn to prop up the market. Despite the dramatic sell-off driven largely by local investors, the index is still up 44% over the last year in local currency terms.
“Although the Shanghai index has little relationship to the broader Chinese economy, the effects spilt over into other emerging markets, particularly as investors anticipated a rise in US interest rates. Developed markets were also affected, despite continued improvement in the US job market and US second quarter GDP growth of 3.7%. In the UK, second quarter GDP growth of 2.6% p.a. and falling unemployment suggested that economic growth is currently strong although there remains global headwinds from a stronger pound and uncertain global outlook. Equity and bond markets continue to look overpriced on an historical basis and there is the potential for further volatility.
“Global commodity prices have been severely impacted by the potential for a significant slowdown in China with many commodities including steel, wheat and copper falling to multi-year lows. Oil fell to $37 a barrel before recovering dramatically at month end to $54 a barrel.”
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