The last few weeks have seen equity markets around the world register significant losses. Sudden downward price movements can be stressful and the conflicting analysis and advice can be confusing. Although I cannot give specific advice on what to do, perhaps I can point out some issues that might have been overlooked and would be useful to consider.
The general consensus is that the current market woes began with a crash of China’s equity markets on Monday, 24 August. The 8.5 per cent drop in the Shanghai Composite Index is what many market commentators agree triggered the global wave of selling. What is not made clear is why the Shanghai tanked and why this would trigger a global crash. The answers proffered are that China’s economy is slowing, and that this in turn will trigger a slowdown in the global economy. This is puzzling because the slowdown has been common knowledge for quite a while now, and anyway Chinese growth is still running at about 7 per cent a year. So what news came out to trigger the price plunge? Nobody seems to have an answer.
Even more perplexing is the effect of China’s economy on the world. The narrative that a brake on China’s economy would slow down global growth has things backwards. China is a supply side economy and depends on robust global demand. It is only if global demand, in particular the United States, were to slow down that we would expect a slowing in the global economy, including China.