Canny investors will make money in these turbulent times, the naive ones will be those losing real wealth
The financial markets have had a rough start to the year and the volatility in various sectors has worried investors. Even the darling of most investors, the real estate market, is facing challenging times. With cash rates and term deposits floating around the 2 to 3% mark, there seems to be little hope of maintaining a positive real rate of return.
What triggered the market downfall was concern about China and the falling oil prices. The spectre of another global financial crisis, as evidenced in 2008, has raised its head. Furthermore, as the US Federal Bank raised its interest rates by 25 basis points late last year, it also worried investors that there will be capital outflow from the vulnerable economies of Asia as investors moved into US funds. All this and fears of underlying weaknesses in the markets, spooked investors who have been on more of a selling spree than a buying one.
Looking at all these factors in isolation, the Chinese market has indeed been growing at a very rapid pace and any correction now gives the market a chance to clean itself. As to how much more needs to be done is anybody’s guess, but the important part is that while the economy may not grow at 8 or 9%, it needs to grow at over 5-6% simply to sustain itself. If 6% growth becomes the new paradigm, then the markets will need to move from there. Interestingly enough, China’s woes have become India’s boon as Indian GDP growth hovers over 7%. India seems to be the only brick standing in the BRICS economies of Brazil, Russia, India, China and South Africa. The investment sentiment will be in favour of India over the short to medium term.
The oil crisis is a self-inflicted one, with Saudi Arabia bringing down the prices to put pressure on not only Iran, but also the United States. There are a whole lot of religious and political factors for the oil war between the Saudis and the Iranians and other issues about fracking, against the US and while the prices continue to come down, the boon to Australian households is a saving of about $14 per week on petrol costs as opposed to two years ago. Those with a more 360 degree vision are fully aware that the oil price downfall is more cyclical rather than long term and permanent.
The biggest driver of the world economy is the US economy. After its meltdown in 2008, the interest rates were down to almost zero and over the past few months, the underlying indicators such as housing, employment and growth in the economy have been strong, such that the Federal bank increased rates in 2015, a decision which was not unexpected. The markets, always nervy about rate increases, have reacted negatively to this decision.
What is indeed encouraging is that the world’s biggest economy is growing. India is taking its rightful position on the global platform as another super economy to China. For investors, the opportunities are there if they keep their nerve and keep in mind the long term value of investing. As a famous investor has said, investing should be like watching paint dry; if you like speculation, try the casino.
Canny investors will make money in these turbulent times, the naive ones will be the ones losing real wealth.