Investors should remain calm despite fall in equity prices
Current market turmoil is temporary, says Danske Invest's chief analyst Bo Bejstrup Christensen, who explains the reasons behind the new year's shaky start.
Global equity markets, including the Danish market, have had a rough ride in the opening days of the new year. Prices have been hit by a combination of negative factors, including further falls in the oil price, concerns about Chinese growth and contagion from China’s tumbling stock markets. Markets have also been affected by the decision of China’s authorities to devalue its currency, the yuan, presumably to benefit Chinese exporters.
Nevertheless, investors should remain calm, says Danske Invest’s chief analyst Bo Bejstrup Christensen.
“Renewed turmoil in China has helped create a negative cocktail of factors that are affecting equity markets and could prompt marked fluctuations in global equity prices going forward. However, we expect markets to stabilise in the course of Q1 and then rise again – so investors should remain calm,” he says.
Below, Bo Bejstrup Christensen explains why neither falling oil prices nor Chinese uncertainty and equity market turmoil should pose any significant long-term concern for investors.
Falling oil prices
Falling oil and other commodity prices have increased concerns about US corporate bonds, as many energy and commodity companies in the US are being squeezed by the low prices and this is creating uncertainty about the value of bonds issued by these companies. Emerging markets, meanwhile, are struggling with weak growth, which presents a double whammy to countries such as Brazil and Russia, who are also major commodity exporters.
“However, we must remember that the low oil price is positive overall for growth in the US, Europe and China, and that the bank systems in the US and Europe appear equipped to withstand any shocks that might stem from hard-pressed oil and energy companies,” emphasises Bo Bejstrup Christensen.
Chinese uncertainty and equity price falls
Turning to China, where construction is in recession and heavy industry is struggling with surplus capacity and elevated levels of debt, Bo Bejstrup Christensen sees a difficult year ahead for the economy and growth.
“But even though we expect China to slow, there is no indication of any imminent collapse,” he stresses.
Nor are recent dramatic falls on domestic stock markets a particular worry for the chief analyst.
“Chinese equities are priced very expensively, as China is a highly speculative market where heavily leveraged private investors drive 80-90% of daily turnover,” explains Bo Bejstrup Christensen.
He sees the current situation in China as a continuation of the equity market turmoil experienced last summer. Back then the authorities sought to shore up the markets by ordering banks to lend money to various Chinese institutions so they could buy equities and stabilise the market. Chinese authorities also banned a number of major investors from selling their equity investments for a period of six months. The quarantine on major investors is set to expire on 8 January 2016 and this has unsettled speculative Chinese investors. However, new rules have been introduced to limit how quickly investors can divest their equity holdings.
“Furthermore, the Chinese authorities will, in our opinion, make every effort to guarantee financial stability, so even if equities decline further, the impact on Chinese growth will be limited,” concludes Bo Bejstrup Christensen.
