August was obviously a challenging month in the markets, featuring a pretty substantial selloff in risky assets of all kinds. It prompts a question as to whether the causes of the selloff will continue to trouble markets.
The great wall of worry
The main causes of concern involved the perceived potential for a hard landing for China’s economy and its possible consequences. The collapse in oil prices was accompanied by a collapse in the market for A-share stocks in China and by a downturn in emerging markets around the world, creating a sense of contagion. This exacerbated fears in a way very similar to what we experienced in 2011, the year of the U.S. sovereign debt downgrade and worries about European sovereign debt.
Data is undisturbed
However, if you look at the breadth of macroeconomic data that has come out in the past several months, it does not appear that global growth is meaningfully slowing. The indicators that we can count and measure to ascertain the strength of the economy in China do not appear to be cratering.
While China has clearly been slowing for the past two to three years, the slowdown is not a new story. Also, when you look back at how long equity markets had gone without a 10% correction, it was likely that at some point the market would be due for one. That’s what we saw in August.
Fundamentals are in the driver's seat
We believe that the market trajectory after the selloff in August is likely to be guided by underlying fundamentals, rather than perceptions of China’s slowdown. That means we expect market performance to be more reflective of company performance and earnings reports during the fourth quarter.