Happy New Year!
The opening trading days of 2016 for global stock markets have not been ideal. These large swings in volatility I suspect will continue which may be a challenging turn of events for investors who have grown accustomed to the unusually low levels enjoyed over the past few years. This was accomplished by the enormous amounts of Government intervention. But since the U.S Federal Reserve took the training wheels off and raised interest rates for the first time in ten years, the volatility not only began, it intensified.
China and Europe have both contributed to the increase in financial market volatility, and it will continue to contribute significantly in the future. In China, economic growth has slowed. In fact, with growth rates in electricity consumption, railway freight volume and fixed asset investment all decelerating, it appears the economy has slowed meaningfully (in spite of the official figures released, which paint a different picture). It is suggested that growth in China will continue to slow as it confronts a series of structural and cyclical headwinds (China’s working age population has peaked and will eventually start to decline, very high levels of debt will likely depress growth, many industries including the banking industry is dominated by inefficient state-owned enterprises, and real estate markets, especially outside the largest cities, are oversupplied). Slowing growth in China is likely to have a number of side effects, including lower global growth, weaker commodity prices and volatility in currency markets. Because of China’s importance to the world economy, this slowdown will impact other countries as well as investors. Lower growth everywhere is likely to keep interest rates at unusually low levels for a prolonged period — a theme we have returned to repeatedly in recent years. Lower investment in China will likely reduce Chinese demand for raw materials, significantly impacting a range of commodities and the countries that produce them, and Canada is definitely one of them!
While economic data out of Europe indicates a tepid recovery may be underway, the union of countries within the Euro zone is showing signs of stress, most recently demonstrated when a Greek tragedy almost unfolded as the country struggled under its onerous debt load and its exit from the partnership seemed imminent. I continue to believe the Euro zone is a potential source of volatility whether it stays together or not. If the union is to remain intact, significant reforms and adjustments will be required to correct imbalances between member countries, which could result in more volatility as changes are implemented and consequences realized. And if it fractures, then volatility will likely increase as officials determine how to unwind the partnerships and establish new trade regulations and currencies.
With global growth restrained by the effects of a Chinese slowdown as well as persistent sluggishness in Europe and the rest of the world, and with volatility re-entering financial markets, I anticipate a period of more muted returns from financial assets along with higher volatility than we’ve experienced in recent years. So what does that mean for us? Given the challenges with commodity-producing countries such as Canada, perhaps it may be prudent to consider diversifying into multi-national corporations which generate revenue from multiple countries. In addition, we will continue to hold a diversified portfolio of high quality investments, including investment-grade bonds (for stability and income), with a focus on companies that pay consistent dividends and can increase their dividends over time. I am confident these factors will assist in navigating through this period of volatility.
My goal is to continue to assess risk/reward opportunities given the underlying market conditions and what I feel the trend will be moving forward.