The first week of March ended on a nervous note as investors concerned themselves with developments in Russia and China. The continued friction between Russia and the West over Ukraine will probably rumble on for a while. Assuming the news flow does not get any worse, investor’s attentions will probably turn to other matters in the coming weeks.
The news that China experienced its first domestic bond default for about 20 years impacted the FTSE 100 in particular on Friday. There are continual concerns as to the state of the shadow banking industry in China; some point to the bond default as an example of how fragile the banking system in China is.
I listened to a conference call hosted by BCA research last week, and amongst the topics discussed was the state of the Chinese banking system. In their view, Chinese bank concerns were overstated. Loan to value rates remain relatively low, the loan to deposit ratio has not grown as deposits have grown at least as fast as loans. The debt levels are overstated, as loans can get double-counted. BCA analysts believe Chinese equities are on a par valuation to what they were in the early 1980s.
I personally took the view that the Chinese central bank wants to fire a warning shot across the bows of corporate China, who maybe feel there is a free government backstop. It is also worth remembering that President Li Keqiang in his state of the union address reaffirmed his commitment to 7.5% GDP growth in China for 2014.
The UK week ahead will focus on the manufacturing and industrial production data on Tuesday. It is a quiet week in Europe; on Monday there is the euro group meeting, consisting of the finance ministers of countries whose currency are in the euro. As usual, there is a raft of data from the US, a lot of the data is consumer related, retail sales, chain store sales and the Michigan consumer sentiment index.
A lot of the weekend press has focused on the 5-year anniversary of the beginning of the latest Bull Run in equities. It has been a great run as the S&P 500 has risen almost 200% in that time. Many analysts question whether this Bull Run can continue. It is worth remembering the rise has not been a smooth one, as investors have faced the possibility of the break of the euro, a default in the US, as well of fears that Dubai would default on its debt obligations.
More recently, this year saw emerging market fears resurface, causing the latest wobble. I tend to take the view that it has taken 5 years for the equity markets just to get back to where they were in 2007, and if the world can stabilise and economic growth can return, I see no reason why equities can’t continue to perform. But I am sure there will more times ahead to test investor’s metal.
It is also worth noting that despite this weeks concerning headlines, the Vix actually fell during the week.