The market weakness has continued this week with a devaluation in the currency of Kazakhstan causing the concerns. We highlight the following factors as driving markets at present:
- The devaluation of the Yuan and the concern of other emerging market currency devaluation have triggered uncertainty in the market. It would appear that this uncertainty has come at a time with the market still grappling with a potential US Federal Reserve rate hike and so the market response has been to sell into this uncertainty.
One of the consequences of the Yuan fall has been to raise further questions regarding the potential demand from China for commodities and we have seen speculative selling in that space. It would appear that we are seeing a capitulation in much of this selling and it will continue until high cost supply exits the market. We remain very cautious towards resource exposed companies with debt but opportunities can emerge for those with stronger balance sheets to pick up distressed assets.
Bank capital raisings have sucked demand and buyers from the bank sector. Simply, the buyers are participating in the capital raisings but not buying on market which is causing weakness.
The market valuation has corrected and is now trading on 15x earnings. This remains cheap relative to interest rates and alternative assets but in line with fair value from a historical perspective. The question we are asking is what will provide a circuit breaker for the market. A more aggressive policy response from China would be helpful and greater clarity regarding the US Federal Reserve interest rate decision would also be helpful. Beyond that we do not see too much froth in markets, corporate gearing levels are modest and domestic savings rates are high so there does not seem to be too much reason for undue concern.