Download Flash! Crash, Bash, Smash...Oh Dash!

Fund Manager's Diary // Iain Little, 17th - 21st August 2015
"Flash! Crash, Bash, Smash... Oh, Dash!"
We wrote this to clients today after 10-20% "summer corrections" in equity markets:
"This past week has been one of the worst in years for most stock markets. (We attached ranking sheets showing "Last
Week" and "Year To Date" performance numbers for several dozen asset markets and asset classes, available on request in 4
different currencies). We've received numerous reports from brokers, managers and
commentators DESCRIBING movements. What has been less voluminous is an explanation of the CAUSE of the declines.
China is frequently mentioned as the cause, with the government allowing a decline in the yuan by widening the USD bands.
The perhaps unexpected market reaction was for investors to push the currency lower. Is this really reason enough to send
markets down by 5-10%, coming on top of previous falls? There are winners and losers in currency depreciations, with
winners normally centred on exporters. Global markets decided that almost every company was a loser.
Market declines were caused by fear as investors tried to guess WHY the Chinese government wanted the yuan devaluation.
The authorities are worried about the ever slowing rate of GDP growth with 7% now looking highly unlikely. Perhaps
growth will ONLY be 5% this year. Most countries would love to see 5%. In an effort to push the Chinese economy back
toward a higher rate, the devaluation was a reasonable way to restore some competitiveness. The government could hide
behind comments like "responding to world pressure to make the yuan more market influenced, and hence a proper
candidate for reserve currency status".
Gold responded as an alternative investment, rising over 4% in USD. Gold shares rose a bit more than that. Over the past
year gold has not been functioning as a refuge, frequently falling at the same time as fear-driven equity markets declined.
Thinking as an investor rather than a short term market timer, the declines in industrial commodities and energy can only be
beneficial to world consumers, industries and the total economy. USD 70 off the oil price is a consumer tax cut larger than
the entire Italian economy. Interest rates remain amazingly low by historic standards. Inflation is not a problem. Jobs are
slowly becoming more plentiful in the world, especially in Anglo-Saxon economies. This is not a depressing scenario.
The FED might raise rates this year if unemployment continues to fall. The betting is for a rate rise in the Autumn. Is this a
disaster? As long as rates are raised because of improving underlying economic fundamentals, they are not a problem for a
stock market. Rate rises due to stagflation and currency pressures are what hurt equity markets. The FED raised rates more
than 10 times in the bull market of 2004-6. The rate rises were seen as justified.
We are not worried over the medium term. But we acknowledge, as always, that almost anything can happen over the very
short term. Last weekend we read calls from some advisors to "jump in quickly on these bargains" and others urging "sell as
the decline has just started". It is too bad that many commentators are so short term. That is speculation, not investment. We
think we are paid by you to invest, not to speculate. The shares we own – global leaders in great part- testify to this.
A few charts will follow on the above points over the next few days. But these are our first thoughts from the barricades."
This diary (the "diary") is published by Global Thematic Investors Limited, a company domiciled in Hong Kong and incorporated under the Hong Kong Companies'
Ordinance on the 15th September, 2005. The diary is not intended for private customers and is written to be read solely by sophisticated investors, such as family
offices, business corporations, banks and financial intermediaries. Statements are completely personal and may change without notice, are often forward-looking and
therefore subject to uncertainty and risk. The predictions and forecasts implied may not subsequently be achieved. The diary is composed of information and opinion
believed to be accurate, though this information may not have been verified. Funds or collective vehicles may only be open to certain persons in certain jurisdictions
and may follow strategies that are speculative and involve a high risk of loss and may go up as well as down (a favourable performance record is no indication of
future performance).
More information about global thematic investing can be found at: www.Global-Thematic.com
We welcome your comments at: [email protected]
Best regards
Iain Little