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Market Commentary

Market Doldrums and Excitable Xenophobia

By August 9, 2021No Comments

9th August 2021

Since early May the main UK and European stock market indices and Japan have drifted sideways, Asia ex-Japan is down about 5%, and China down 12%. The US stock market is up 5%.  India is a surprise winner, up nearly 10%.  That’s it over the last 3 months, a bit of a party-pooper after the prior 6 months.

Does it matter?  No…

In the prior 6 months some of you may have made around 40% in the right funds with a UK bias.  For perspective, that was about 4 year’s worth of gains compared to the average stock market growth per annum over the last 100 years.  Put that way, a breather in the markets should be expected and welcomed – otherwise we invite the sort of mania conditions which never end well – and which still persist in the US.

Yet many of you may find yourself itching to do something. Our view has always been that when the markets rest, you should do similar.  Many great investors have put this in different ways, one being, of course, Warren Buffet:

“The stock market is a device for transferring money
from the impatient to the patient”.

 The impulse to do something, anything, can be very strong.  Don’t.

Let’s move on…

While climate change has rightly dominated large parts of the media in recent weeks, the FT has notably majored on China.  The reason is that western investors are scared, and here’s why…

The Xi government has enacted more-aggressive-than-expected regulatory hits.  The three sectors most impacted have been education, technology and property.  The usual suspects in the UK media got into a ferment – reds under the bed, can’t be trusted, objective world domination etc – because where they see something different, they always see a threat.

The truth is quite different, and has been well understood since the 1970s with the emergence of Deng Xiaoping and his reform agenda.  Deng was a pragmatist, and was prepared to try different techniques to pull the Chinese economy out of a Mao-inspired-hole, not helped by 500 years of isolation.  He sought social stability, modernisation and Common Prosperity – these were the long term goals.

It was also accepted by Deng that some individuals would “get rich quickly” and this would widen inequality.  But in so far as this was an experiment, as events unfolded those long-term goals would be the guide to short term action. 

Take conspicuous wealth on the scale enjoyed by Jack Ma.  Was this grandeur to be an accepted part of the long-term plan for China?  Or was this not compatible with the ideas of social stability and Common Prosperity?  Of course it wasn’t.  While the West is struggling with issues of inequality, which throw up unexpected outcomes like Trump, China is dealing with it.

We have previously highlighted the drive by Western governments to take action against the dominance of the big tech firms.  Partly this is about tax (that inequality issue again).  Partly it is about those companies having monopolies, which, among  other things, stifles competition. This is always a risk in an economy, and is why, in the US, Anti-Trust legislation has been in place since the 19th century. (the Americans call monopolies “trusts”.)

In the West, including the US, governments and regulators talk about taking action against these giant corporations. But it is horribly slow – “democratic ditherers” as The Economist put it.  In sharp contrast, China is dealing with it now.

Access to education is vital to reducing inequality.  In China the tutoring sector is worth $100 billion a year, and the government had been signalling increased regulation for months.  Mounting education expenses for parents, and advertising which played on “education anxiety” amongst parents, was deemed unreasonable – social stability and Common Prosperity guided this intervention.

Specifically hitting US-listed Chinese companies might have had other objectives – perhaps muscles being flexed.  Nonetheless, the recent crackdown across these sectors is easily explained by tenets which have been established since the 1970s.

Thankfully the damage to the Chinese stock market, and China funds, is limited.

Deng talked of “groping for stones while crossing the river.” As a result of these “stones” being encountered in China’s multi-decade experiment in modernisation, it might be that we will get more clarity around what is and isn’t acceptable within the, still emerging, Chinese model.

Fingers crossed that the latter will emerge.  China has a long way to grow, and we all need it to participate in dealing with a wide range of global issues and problems.

So beyond stock market doldrums, the excitement is more xenophobia, plus cracks continuing to grow in the cryptocurrency universe, which some believe might be the cover for the greatest Ponzi scheme the world has ever known – watch this space.

Dennehy Wealth