By Eric Anderson, Managing Partner & Head of Investment Solutions, Milltrust International.
The view that market participants are over-reacting to ‘negative’ news has now become a consensus opinion amongst market watchers today.  With experts being wheeled into TV studios to give their 2 cents on why the ‘world isn’t that bad’, ‘investors are over-reacting’ and how it’s a ‘great time to start buying cheap risky assets’.  But markets aren’t listening.  When oil prices fall, an indiscriminate equities market sell-off still follows; likewise, when perceived ‘negative’ news on China hits the headlines or when any hint of a more hawkish tone comes from the Fed, markets fall.

Let’s address some of these ’worries’ that have been sending jittery investors into a frenzy.

Worry #1: Low oil price.  A large number of investors are using the price of oil as a barometer of where we are in the global economic cycle despite the numbers pointing to a clear case of oil over-supply.  In fact, oil demand is higher than it’s ever been.  China’s economic growth may be down, but oil consumption is certainly not collapsing with demand for the commodity up 6% year-on-year.  Despite what some headlines are suggesting, this is not the beginning of a China-led global recession.  Cheap oil benefits most Emerging Markets, including the more important economies of China and India.

Worry #2: A Slowing China.  On the one hand, we accept and embrace China’s decision to move to a more service-led economy and yet on the other hand we panic when the economic data starts to soften when industrial production drops off.  This is simply part and parcel of the huge re-balancing effort.  And it’s not over yet; the much-needed structural reforms undertaken by the government to remove some over-capacity will continue to cause more contraction in the manufacturing sector.  The bottom line is that China still controls the banks who have relatively low loan-to-deposit ratios making a banking failure (the trigger to the crises in 1998 and 2008) a very remote possibility, it also runs a large current account surplus and has relatively low central government debt/GDP which mainly consists of internal debt.  The low debt will allow China to pursue additional fiscal stimulus which should alleviate the pressure from having to cut rates and risk more capital outflows.  Whilst government policy will go through its fair share of teething issues which will inevitably lead to more short-term bouts of volatility, the shift to the new economy in China is a good thing and the likelihood of a hard-landing is minimal.

Worry #3: A Hawkish Fed. Governments in most emerging economies have reduced their exposure to US interest rates over the past decade, by issuing a greater share of public debt in domestic currencies.  This has been a significant structural change over the last 20-30 years in the developing world.  Instead, the ‘worry’ here should be selective and mainly focused on those economies that depend on short-term capital flows to finance current account deficits. Otherwise, a strong US economy, robust enough to convince the fed to start raising rates, benefits several emerging markets who feed and profit from the American consumer.

Experienced investors will point out that sentiment and momentum driven markets often driven by fear eventually subside (usually sooner rather than later) and give way to common sense and rationale investing that reward investments in profitable businesses and sound economies.  In the meantime, stop worrying!

Eric Anderson is the Head of Investment Solutions at Milltrust International and the lead Portfolio Manager for the Milltrust Global Emerging Markets strategy.