The wild volatility on global markets has everyone searching for a way to think about it.
There’s an Australian stockbroker who might help.
On Monday, when the Chinese stocks collapsed 8.5%, Marcus Padley wrote in a note to clients: “The new theme is fear of a GGC – Global Growth Correction.”
He said that “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.”
The idea that this is a global growth correction fits the facts in a number of ways.
First, a huge amount of the concern about global stocks centres on the future of China. Its stock market has been wild, and sold off spectacularly, sure. But the stock market is a small part of the economy in China. The bigger question is whether the world’s second-biggest economy is weaker than Beijing let everyone believe.
Second, the sudden devaluation of the Chinese currency, breaking with years of tradition, signalled China’s willingness to secure its competitiveness against other emerging economies. China’s current boom was built on being able to sell huge amounts of technology and textiles to the world, and it wasn’t going to let other countries undercut its prices any longer.
And third, possibly most importantly, analysts are increasingly worried about the impact that the current adjustment will have not on China or the US, but on developing economies.
Asia’s emerging nations are trying to deal with a trade recession and an accumulation of private-sector debt that is not going to withstand easily a hard landing in China. As ANZ put it this week, “the timing of China’s currency reform is not ideal for the rest of the Asian currencies”.
China is laying down a lot of Asian economies to get run over.
China deciding to make its exports cheaper is deeply unhelpful for the domestic economies of those emerging nations. This in turn hurts the global outlook because developed economies – the US and Europe – are still trying to claw their way out of the GFC cavern, but they need the emerging economies to have some zip, so they will buy their advanced products.
Government balance sheets in developed economies are destroyed everywhere. Faith among investors that governments can deliver significant reforms is low. So the world is counting on the relatively small, but important, growth from the combined emerging economies.
Not unlike many folks in the financial industry, Padley doesn’t see the events of this week as a total capitulation. Here he is in a note to clients on Tuesday:
[This] is a Global Growth Correction (GGC), whatever that turns out to be. It is not the 2008 GFC because the GFC was completely different and much longer lasting. The GFC was a credit crunch, a global contagion of the banks and to get over it we have printed money, cut rates, plastered over the issues with more financial Band-Aids than anything we have seen in the past and in doing so convinced ourselves that everything will be ok. This is not the GFC 2. Not a financial crisis.
Former head of developed market equity strategy at Morgan Stanley, Gerard Minack, pointedly argued this week that expectations for growth in prices – and therefore company earnings – are tanking, and have been for decades. Look:
This deteriorating outlook is, again, why emerging markets have become such an important part of the global growth story: the world needs emerging economies to buy and sell more goods and services.
China is slowing down faster than it thought, and is demonstrating that it is perfectly willing to steamroll some smaller guys in the process of protecting itself. And this is precisely why investors around the world are reassessing the outlook for global growth, triggering so much volatility in markets.
“Global growth correction” is a good way to put it.