The Straight Talk Blog

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Best regards,
Rob, Rupel and Richard

 

January 2016

Headline Headaches
Jan 7, 2016 12:38 PM
Heathbridge Capital Management

Once again, the news is churning all of our markets – and all of our stomachs! The chartists are pointing to “breakdowns” and the momentum players are having them.

There have been three main themes to the market volatility – the threat of an economic slowdown in China and related collapse of the Chinese stock markets;  threat of a wider war in the middle east; and a nuclear detonation in North Korea.

The question of the degree to which China will slow down is a matter of divided opinion amongst economists. If in fact there is a significant slowdown, we think it will have only a minor effect on the Western economies over all others, but there could be significant impact in the resource sectors, particular oil and copper. Declines in commodity prices are stimulative to other parts of the economy.  In the opinion of the Federal Reserve, the US economy is still on an upward trajectory. There appears to be a minor economic correction happening that can be attributable to the effects of an economy-wide inventory build-up earlier in 2015. We expect that this effect will wear off in 2016. Europe’s recovery from the economic horrors of 2008 has been slower than that of the US. Its environment for business formation is less favourable but there is no good reason that we have seen that leads us to believe that Europe is not going to steadily recover. Within the companies that we follow, business has slowed a little but most managements we talk to are planning for continued growth in sales. With this market correction, some share prices are becoming very attractive.

As they do with their economy, the Chinese government is tinkering with their stock markets, buying stocks to hold up prices and shutting down exchanges when they drop too much. These actions will only exacerbate the downward trends, so the collapse of the Shanghai and Hong Kong markets is likely to continue. While fear of contagion is pushing share prices down elsewhere for the moment at least, we think that in time the Western markets will become inured to region-specific gyrations.

The latter two headlines are in the nature of “geopolitical risk”. The market reaction to such news almost always generates an opportunity. The worst of these types of headlines in history was the bombing of Pearl Harbor.  Within nine months of that news, the stock market recovered past previous peaks. The sabre rattlings in Saudi Arabia, Iran, and North Korea are hissy fits in comparison.

Just as we built cash as stocks reached our trim targets in the past two years, we are taking advantage of the current malaise to deploy a small part of it. We still hold cash balances in excess of 10 percent on average and are staying vigilant for opportunities.

As is often true in these corrections, it is best to keep calm and carry on!

Please don’t hesitate to call any of the “Rs” if you have any questions.

Rob Richards    Rupel Ruparelia   Richard Tattersall