The "Global Growth Correction" has started (original) (raw)

The "Global Growth Correction" has started - written by Marcus Padley (Marcus Today Newsletter).

24th August 2015

Wall St fell 530 points on Friday. Apple fell 6%, Microsoft 5.5%. The Dow Jones is down 888 points or 5.16% in two days. The S&P 500 (a much more representative index) is down 5.3%. They both closed on their lows by the way (not a great sign).

Lets try and keep this short.

**What we don't know:

**The Future...and any adviser telling you with any certainty that they know what is going to happen next is deluded. We are in the hands of a herd and volatility is high.

**What we do know:

• **There has been a sharp correction on Wall St in the last two days – although many will be denying it and telling you there will be a short covering rally the truth is that a sharp drop often punctuates the start of a new downtrend.
• This represents **the first technical break of a 2-3 year uptrend (bull market) in equity markets in the US and in our market.

**The main concern:

• The new theme is fear of a ****GGC** - ****Global Growth Correction** – concerns that weakness in China is going to undermine US recovery, undermine European recovery and undermine global growth. It is far too early to assume this and it is not a crisis yet, but this is the fear.
• Note that if this theme develops it is a global **growth issue not a global **financial issue. Different to the GFC. This is **not about credit markets tightening up it is about growth assumptions being downgraded, it is not nearly so stressful for the markets as a GFC. It really is a 'Global Growth Correction' not a 'Global Growth Crisis'.
• ****Stocks most at risk include**: Anything to do with China, commodities and resources, US exposed stocks, growth stocks, cyclical stocks.
• ****It is not good for Australia** thanks to our close economic association with China. If it develops it is going to cause International institutions to sell anything to do with China which includes their Australian assets, Australian equities and the A$.
• **Defensive stocks - Banks and Utilities/Infrastructure - are going to be a rally point for retiree investors. The numbers on the banks are good (assuming they are not downgraded) and the banks are already down 20% or more and yielding 8-9%, they may well get caught up in the selling but they will outperform (small consolation) and we’re holding.
• ****We don’t hold any resources** already…we are in the right stocks.
• ****Our main concern** is that if this theme develops we are holding some growth stocks and US facing growth stocks in the top 50 portfolio which will get caught up in the theme if this develops.

**So the bottom line message is:

• **Not selling banks or utilities/infrastructure based income stocks (I already see brokers saying “Buy Banks” this morning). Safe income will continue to be the go-to theme.
• Continuing to **avoid anything to do with China which includes resources and commodities based stocks including Energy/oil stocks.
• **Pruning growth stocks as a precaution.

**Finally - If you want to sell…sell.

From a personal point of view (different risk profile to you - I'm quite short term) this sort of event is not something I want to spend every morning second guessing and I recognise that the probabilities have turned against us, the new trend is down not up. Also, I have long had a suspicion that there is a price to pay for all the money printing (QE) in the US and Europe and long suspected that the Chinese growth story was something to be suspicious of. I have also long stated that whilst these fears are fairly universal you don't act on them but you go with the trend (the bull market) until it ends. It may have just ended.

Forget the recent highs - I also find it very hard to believe that this short sharp slap in the face is not going to impact the herd’s attitude for some time ahead. Whilst it may bounce tonight or this week this is a warning and I do think that if you sell now, whilst you may get it wrong tonight or tomorrow it is more likely to be right than wrong in the medium term. Put it this way...the chances of the market hitting new highs in the short term have lengthened considerably because of this scare.

So I’m out personally, and I would not stop any client doing the same.

Also - The biggest crime of financial advisers and brokers in the GFC was saying “It’ll be alright in the end” – keeping the clients in. No-one knows if this theme will develop or dissipate tonight, this week, this month, but rather than take the bet, rather than live the volatility the message I would convey to Members is the same message I would tell my friends and family, if you want to sell, sell. You can always buy back in again later. With commission costs so low these days it’s no big deal and it delivers peace of mind, you sleep at night and you wake up hoping Wall St falls 540 points. Capital gains tax issues aside.

So my message is this – No-one knows if this is a momentary loss of composure or the beginning of the end but I’m not hanging around to find out. As that TV Ad says - The ship is safer in the harbour but it is not what ships are designed for. Yes...but there are times when the ship is safer in the harbour. It is hard to sell now but this is ‘the moment’ to make the decision because it could get very ugly. And we don’t need to join the throng of advisers and commentators spouting unfounded wisdom with our fingers crossed behind our backs.

Thankfully we are well positioned for this in our Portfolios holding a lot of cash and no resources. We are not flinching in banks, infrastructure/utilities and income stocks (defensive stocks) but we will be pruning some growth stocks from our TOP 50 and GROWTH portfolios as a precaution today. We are selling all trades.