The current volatile market environment should make you take a relook at your investment portfolio if you have not done so already. There are signs of long term changes in market conditions, which could fundamentally affect your portfolio. You may have to take some tough decisions to sell some assets even at loss if necessary, book profits and rebalance your portfolio to reflect the future.
What is the single long term change that is seen in the markets today. The change is China. China to a large extent has been the biggest driver of the world economy since the beginning of the year 2000. China grew at breakneck speed even as it singularly took up commodity prices. Chart 1. China is now stuttering and that is driving down commodity prices globally, affecting world trade and placing foreign capital at risk. The Yuan has been on a continuous uptrend since 2006 Chart 2 and with that came in foreign capital to take advantage of a seemingly unshakable currency and now with Yuan weakening, this capital is exiting China and taking asset prices down along with it.
Chart 1:Thompson Reuters Jefferies CRB Index
The fall in commodity and oil prices is affecting economies that derive most of their revenues from commodities. Big economies such as Brazil and Russia are seeing recession while countries such as Saudi Arabia are facing issues in balancing budgets. Sovereign wealth funds that grew big such as Qatar and Norway have been selling assets to fund domestic expenditure. Selling of assets by these wealth funds are hurting markets globally.
One part of the world is deep in economic crisis due to China affecting demand globally.
China due to its over investment and its demand for thermal power is facing pollution issues. China has become the largest market for automakers globally and with the country facing pollution, the tendency is to curb use of automobiles. This could lead to a glut in automobile supply leading to worries for the sector globally.
China is a super power and is increasingly showing its strength. This will lead to rising defence spends globally leaving economies that much less to spend on infrastructure.
What should you do based on the China factor? Exposure to stocks that are hurt by China factor should be cut. Given low commodity prices, inflation expectations will stay down globally and that would keep interest rates down. Selective bonds that provide capital protection as well as yields would be good investments while consumer driven stocks would benefit from low inflation and low interest rates.
The themes of technology and disruption would gain further ground as economies struggle for growth.
Take a good look at your portfolio and make the necessary changes now.
Early days of 2016 is turning ominous for markets. China is leading global market volatility with its currency down over 1% and equities plunging 12% since the beginning of the year. Chart 3 . Oil prices are trading at eleven year lows with further downside being forecast for oil. Add to that tensions in Middle East and North Korea are also hurting market sentiments.
Chart 3: Shanghai Composite Index
Risk aversion is seen globally with global bond yields down and USD and Japanese Yen strengthening. Table 1 and Table 2. Gold prices have moved up by 3% since the beginning of the year.
India is seeing global volatility taking its toll on the INR and Sensex and Nifty while ten year benchmark bond yield has been stable. The INR is down 1% while Sensex and Nifty are down over 3% since the beginning of 2016.
Table 1:Global Yields Movement
Table 2: Currencies Movement