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August Market Volatility

25 August 2015

As most will be aware, August has seen a significant increase in volatility in global markets, associated with sharp declines in major equity and credit markets, and in particular in the commodity markets. The source of the volatility is a concern over the rapid cooling of economic growth in China, and what that means for its local equity markets and its demand for commodities. We previously highlighted measures that the Chinese authorities had taken to stem the moves in the local equity market, and it is fair to say that these have had a limited effect. On 11 August, the People’s Bank of China further rattled global markets with measures taken to devalue the local currency. This move on the Yuan was taken as a further signal that the Chinese growth picture was worse than had previously been thought, and has raised fears of repatriation of foreign investment not only in China, but from the Emerging Market complex as a whole. All of this has complicated the picture for the US Federal Reserve, which is seeking to hike rates from effectively zero, where they have remained since late 2008.

Whilst we are wary of recent moves, and have highlighted that China is quite opaque for foreign investors, we believe that the US Federal Reserve is likely to delay any move as a result of the volatility, and more importantly, temper the rate of hikes after any initial move.

We are watching developments closely, discussing on a daily basis, and have set levels for a number of major equity markets where we would materially add to our equity exposure. At current levels we have commenced adding equities in smaller size, and believe that the portfolios will benefit to the extent that they can look through the short term volatility which is creating opportunities to those investors with a longer time frame. The Australian dollar, which has fallen to new post GFC lows overnight, is likely to support the portfolios in the face of declining commodity prices, and the possibility that the Reserve Bank may also be forced to act again.