World economics and the ongoing volatility in the equity markets

Wade Balliet
Posted by Wade Balliet
Investment Strategy

The following is a perspective from our Investment Strategy & Advisory Team on the recent market volatility. Please contact a Portfolio Manager or Private Client Advisor with further questions or concerns regarding this material.

Where we are

view of red (loss) and green (gain) ticker-tape stats on a black electronic screenEvents within emerging market economies have dramatically increased global market volatility, above and beyond levels seen earlier this year due to Greece. Most importantly, China’s renminbi (yuan) currency devaluation has particularly shaken short-term investor sentiment. This event is a result of the slower world economy and the climb of the Chinese currency by 33% against the U.S. dollar from mid-2005 to mid-2013, as reported by the Congressional Research Service.

Chinese exports have dropped due to decelerating demand and increased competition from abroad as the currency increased on a relative basis to many other emerging market countries. This currency devaluation is intended by the authorities in Beijing to make Chinese goods more competitive on a worldwide basis. However, there has been some pushback from other countries to protect their exports as well, and additional currency devaluations can be expected. This uncertainty is creating broad-based volatility which has unsettled markets, but we do not expect this to last long.

Where we are going

The economic GDP for China is still expected to outpace that of the United States, Europe, or most of the rest of the world and should reaccelerate into the future as the economy and demand continues to improve from the United States and Europe. We expect that it may take some time to see this reflected in the returns for emerging markets equities, but there is little reason to expect otherwise.

Here at home, economic conditions continue to improve. Employment statistics have been positive and are continuing to strengthen (see Scott Anderson’s recent U.S. Outlook) and, as a general proposition, real estate sales are up (’s July report), real estate prices remain strong (latest report from Federal Housing Finance Agency), and balance sheets look good for both consumers and corporations. Domestically, we should benefit from lower prices due to favorable exchange rates and U.S. corporations that are manufacturing abroad should see improved profit margins. Low commodity costs typically add additional support to corporate profitability as do low energy prices as a whole, although companies and states that rely on the oil industry will likely suffer from continued low revenues on weak pricing in that sector.

The volatility for the U.S. is expected to be transitory in nature, and the equity markets should finish the balance of the year well.

The views presented are of the Investment Management and Trust Division of the Bank of the West Wealth Management Group and should not be construed as investment advice. Past performance is no guarantee of future results.

All investments involve risk. Investors should seek the advice of a financial professional regarding the appropriateness of any securities or strategies discussed. As with any investment strategy there is a possibility of profitability as well as loss. Foreign securities, especially emerging markets, will involve additional risks including exchange rate fluctuations, social and political instability, less liquidity, greater volatility and less regulation. Frontier markets have lower market capitalization and liquidity than more developed emerging markets. Diversification spreads your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.

Bank of the West Wealth Management provides financial products and services through Bank of the West and its various affiliates and subsidiaries. Bank of the West and its various affiliates and subsidiaries are not tax or legal advisors. Please consult your tax or legal advisor for more information regarding your personal situation.

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