Below, we share a letter sent to our clients with our thoughts on China, the recent market volatility, and our outlook:
Dear Valued Client,
Given the heightened market volatility in recent weeks, I wanted to take some time to provide our thoughts on recent market dynamics and our view going forward.
China remains the focus of worldwide markets and recent events in China have underscored how volatile the local Chinese market can be. Specifically, the Shanghai Composite stock index has fallen over 36% since its June high. However, it is important to note that this has merely reversed the rapid gains in China’s stock market since the start of the year, as the Shanghai Composite is flat year-to-date through August 24, 2015 and up 45% for the past year. In reality, the Chinese stock market had become extremely overvalued (think the Nasdaq Composite in the late 1990s) and a correction was imminent. Our clients’ portfolios have very little direct exposure to China and we have done our best to minimize indirect exposure.
While the Chinese currency devaluation on August 11th caught investors by surprise, the yuan had become extremely overvalued due to its near-peg to the dollar. Even including the recent devaluation, the yuan has fared better versus the dollar over the past year than every major currency that is freely traded as a result of China’s tight control of the currency despite fears surrounding its slowing growth. Subsequent actions by the government to stabilize its currency lend credence to the notion that further currency moves are likely to be orderly.
Ultimately, all of this has added to fears of slowing Chinese economic growth, as evidenced by several recent economic data points that have come in weaker than expected. Nonetheless, the International Monetary Fund projected the Chinese economy will grow 6.8% in 2015 and, although that is below the government’s 7% target, it still represents fairly strong growth. It is also important to note that the U.S. economy is fairly insulated from China’s economy and China’s stocks are not widely owned outside of China. In fact, only 1.5% of Chinese shares are owned by foreigners, according to Capital Economics. Additionally, the U.S. tends to be a net importer of goods and what we do export to China tends to be agricultural, consumer-focused, or input goods that go into Chinese exports to other nations (some exports return here to the U.S.). U.S. economic data have been improving, with unemployment and housing representing particular bright spots. Data from most other developed nations have also improved and there is little to justify fears of a major global downturn.
History has proven that the best long-term strategy is to buy and hold in environments such as these, maintaining your investment goals and risk tolerance. We’ve seen similar dips to this one in October 2014, June 2012, August 2011, and in countless prior years. These all proved to be temporary with the market ultimately achieving new highs.
That said, the best complement to a sound long-term investment strategy is an occasional rebalance. We outlined this in our May 2015 Monthly Newsletter in a piece fittingly titled “Time to Ring the Register and Rebalance.” Since the beginning of the bull market in March 2009, the stock components of many portfolios had grown relative to the bond components. As a result, Condor Capital rebalanced those portfolios where the stock portion had grown 5% or more over their target allocation back to that specified target to lock in those gains. Note that not all portfolios required rebalancing at that time due to various factors including when the account opened, the type of account, liquidity needs, etc.
It is important to remember that stock market corrections are fairly common events. In fact, on average, corrections of 5% or more tend to occur three times a year, corrections of 10% or more occur about once per year, and corrections of 15% or more tend to occur once every two years. Three important lessons to keep in mind are that no one can consistently predict when market declines will happen, no one can predict how long a decline will last, and no one can consistently predict the right time to get in or out of the market.
In summation, the current market volatility has truly been “Made In China” and we view the “Made In America” economic recovery as being very real. Despite sluggish growth, there are no concrete signs of a global economic downturn. We feel the fundamental story remains intact and we remain constructive on the United States in particular, where the vast majority of our client portfolios are positioned.
Please do not hesitate to contact us with any questions or concerns. We would be happy to discuss the markets in more detail with you, as well as assess your individual situations.
Condor Capital Management