George Lucas
Fears about a slowing Chinese economy, sparking an aggressive sell-off in equities across the globe on “Black Monday”, was an over-reaction by investors and a misreading of the Chinese economy, says Instreet Investment managing director George Lucas.
“The selling, which was compounded by uncertainty around the next Fed interest rate move, spooked equity markets with the Australian market alone shedding $60 billion in market capitalisation on Monday.”
“But by the end of the week investors were back in the market, perceiving shares had been oversold, and that the Chinese economy, while still giving grounds for concern, was not heading for a hard landing.”
Lucas says that he believes the talk around the economic fallout from the slump in Chinese equities has been overdone.
Investors are confusing the selling off of shares on the Chinese share market with China’s real economy where the economic data does show slower growth, but it is not weak enough to justify the fears of recent times.
“In addition, worries about new crises in emerging markets are exaggerated – this is 2015, not 1997. Those economies are far more robust.”
Recent noises from the Fed indicated there may be a rate hike in September – and this helped rattle equity markets.
Lucas says the recent panic over China, and some slightly dovish comments from the Fed vice-chair, has led some investors to conclude that the Fed will be less inclined to tighten monetary policy in September.
“Although revised predictions of a December rate hike are reasonable, commentators predicting more QE and looser policy look silly with US GDP growth revised up above expectations to 3.7%.
“The market is still predicting that there is a chance of a September move, with two weeks of economic data to analyse; however the recent panic, and a fall in core inflation, the case appears to be weaker than two weeks ago.
“The Catch 22 is that uncertainty around the Fed’s decision is adding to the volatility in the market which could delay the decision.”
“ This is the new normal that investors should be ready for.”