Few investors predicted the carnage that has hit global stock markets in 2016. It’s a sea of red with share prices tumbling, investor sentiment deteriorating and the outlook worsening day-by-day. For most investors, there seems to be no hope while dreams of an early retirement or paying off the mortgage seem distant and unlikely.
That’s one way of looking at it, anyway.
Clearly, the FTSE 100 has made a poor start to the year and the market is nervous. However, the idea that the stock market is about to endure its worst-ever performance and sink into a major bust may be misplaced. After all, the world economy is in a much stronger position than it was prior to the credit crunch and in any case, the global banking system is far more robust now than it has been for a long time.
US and China, misplaced concerns?
Despite this, investors remain fearful regarding the prospects for the two largest economies in the world. This nervousness is entirely understandable since both countries are embarking on major transitional periods that inevitably are likely to cause discomfort and challenges in the short run.
In the case of the US, its economy is performing relatively well. Unemployment, GDP growth and consumer confidence have generally held up well in recent years and even prompted the Federal Reserve to raise interest rates in December. However, this marked the beginning of a new era for the US, where loose monetary policy was no longer a given and this has clearly caused markets to lack confidence in the prospects for continued economic growth.
With China, the situation is perhaps more complex. On the one hand, we’ve all been fully aware that the world’s second largest economy won’t be able to rely on capital expenditure for its growth in the long run. Therefore, it needs to change and transition towards a more consumer-led growth model, which it’s doing at the present time.
As with any economy, growth doesn’t remain at double-digit levels in perpetuity and eventually the rate of growth slows down to low-to-mid-single digits. This is the situation in China. Although the rate of slowdown is perhaps quicker than many people imagined it would be, the country is nevertheless still offering more than double the rate of growth of any developed economy.
In the long run, it seems highly likely that the US and China will deliver strong growth numbers. They’re both going through changes, but with the Federal Reserve unlikely to raise interest rates at a rapid rate and an additional 300m-plus middle-income Chinese consumers due to emerge within the next 15 years, the prospects for both economies seem to be very, very bright.
As such, and while lower share prices can’t be ruled out in the coming months, it seems logical to buy while there’s the fear of a bust so as to position a portfolio for the boom that seems almost inevitable in the long run.
