Chinese plunge rattles markets across the globe

European markets are down by 18% and nearing bear market territory. The US market has also been effected and is entering a correction phase with drops of 10%.

Emerging markets have been hit the hardest and this is especially apparent in markets linked to China. We have had virtually no exposure to emerging markets in our portfolios, for the last two years, so overall we have outperformed the markets.

In addition to drops in the equity markets, commodities have also been hit hard. Oil prices have dropped as low as $38 a barrel overnight.

While markets have dropped substantially over the past few days, it is our view that there has been a severe overreaction. China is experiencing difficulties; however, it seems highly likely that China experienced a recession at the start of this year. This was largely caused by a reduction in lending to local governments, due to internal accounting changes in china. These issues have now been resolved and property prices in China have begun to increase. The US economy continues to grow and Europe is now moving out of recession.

In addition to the fall in the price of oil and the devaluation of the Chinese currency, there will now be even less reason for the Federal Reserve to begin raising rates in September. With this in mind we expect to see equity markets rally over the next few weeks, with main markets returning to previous highs by Christmas.

The oil market may take longer to correct and we see a 50/50 chance of further drops to as low as $35 a barrel. However, with oil prices this low we see a fantastic opportunity in the longer term.

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