nothing much new in this, but reaffirmation of what most of us have been talking about.......
the bit about the consequences of the Chinese yuan being pegged to the USD was food for thought for me......i'm not sure that I necessarily agree with the conclusion though.
Global currency shake-up creates opportunities
We have witnessed a dramatic reassessment of currency values in recent months. The euro and $A have slumped against the $US.
The shock waves from the dramatic shift in currencies is having – and will continue to have – an impact on inflation, bonds, corporate earnings and equity markets, which all investors need to be aware of.
We believe the full extent hasn’t been felt yet, and currency changes could trigger a US correction and worsen recent falls in the Australian market.
The good news is that it will throw up opportunities for value investors in coming months.
Most would have read about the recent collapse of the $A against the $US; but the euro has also fallen steeply against the US, with investors anticipating an end of US low interest rates; investors are also fleeing negative yielding European cash and moving into $US. Chinese goods get more expensive
One of the major impacts of the stronger $US is on China, which has pegged its currency, the yuan, to the $US.
After a period of a falling yuan against the euro and $A, we’re now entering a pretty savage period of the yuan revaluing – through the $US – against the euro and $A
That’s significant because China is the world’s big trading economy, particularly in consumer goods.
Basically, Chinese goods will become more expensive. If we look out a year and currencies are sustained at current levels there’s a distinct likelihood of imported inflation coming into the Australian and European economies. That danger is not reflected in bond yields. Risk of a US market correction
But the higher $US will also hurt US multinationals who earn money in regions such as Europe. A weaker euro means their European profits when translated back into $US will be lower.
Indeed, there is potential for earnings growth in the US to slow because of the currency effect. That could put pressure on US stock markets.
There is a correction underway in Australian and European markets (The German market is down around 8 per cent). But if the US market weakens, that could spill over into the likes of Australia and this correction could have further to run. Opportunities in the next few months
All markets, except the US, are posting negative returns for the calendar year so far. The US market needs only to correct around 5 per cent to become negative as well. Based on currency movements, which will likely trigger US market weakness, all markets will be negative by the end of the year.
We have been consistently saying to clients there is no hurry to buy and we feel vindicated in that view.
The shake up of currencies has some time to play out across most markets and the stock market, with further falls likely.
That isn’t a bad thing. Those clients with liquidity should be able to access fairly weak markets in the next few months.
