The Markets Don’t Like Uncertainty

Written by:  Martin X. Shields

We live in an uncertain world where change comes quickly and the results of those changes are not always known. Unfortunately for investors this statement causes the market a great deal of heart burn.

One of those areas of uncertainty is China’s recent devaluation of its currency, the Yuan, which had been pegged to the US. Dollar since 1994. The reason China allowed the devaluation of the Yuan to occur was to make their goods and services more affordable since their economy relies so heavily on exports. This action by the Chinese government to change their policy after more than 20 years came as a surprise to the markets and increased fears over China’s economy slowing down. As the graph below shows, even though the Chinese economy is slowing it’s still growing at a faster rate than most of the world.

Large U.S. companies that export to China could be negatively impacted by the lower Yuan but most U.S. consumers will benefit as we import a great deal from China. The U.S. markets have been negatively impacted by the combination of China’s uncertainty along with the potential for the Federal Reserve to raise rates in September and continued weakness in the oil markets. As is shown in the graph below, the biggest impact across all markets from the recent volatility has been in the emerging markets. As you can see there has been a 20% swing in performance from May of this year when those markets hit their highs to this week where they are down by 10% from where they started the year.

As is frequently the case, the markets are overreacting to the current global headlines and the reality of the situation is this change to the Yuan will have limited impact on the global economy and the markets.