China Is Not A Crisis For Investors

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Written By Farid Shojaei

Financial experts call the fall in stock market values a correction, but to millions of ordinary investors the crash represents a huge loss of money.

Many want to know whether this week’s plunging stock prices are a blip in the market or a danger signal that warns of the end of another investment cycle and more doom and gloom for retirement savers.

Emiel van den Heiligenberg, Head of Asset Allocation at Legal & General Investment Management and his team have put together an analysis of the current state of the market to try and clear up what is happening to share prices around the world.

Their view is investors should have a more realistic long-term attitude that builds in lower growth expectations and that market volatility is a blip rather than the start of a stampede to sell.

Low growth ahead

“The overall picture seems to project that low growth is here to stay for a while and the shock of devaluation, slowing output and changing interest rates will slow the world economy for a time to come,” he said.

“This will affect decisions to increase interest rates, which are viewed as a tool for managing an increase in inflation as the current economic conditions may see inflation automatically increase.

“The professional view, which is not only ours, is that normal growth is low growth and not stagnation.”

Heiligenberg points out that economic growth is six years into a cycle and that historically, around this ‘mid-term’ stage, markets correct.

It’s a question of value and expectations – many investors have looked for short-term gains which are not there instead of taking a long-term view.

Search for yield

“Slow growth is not bad growth because the economic cycle is longer,” he said. “Investors will see returns, but not immediately.

“Other benefits are commodities are cheap – such as the price of oil. Banks do not have to tamper with rates and credit seems readily available. All these are taken as mid-term cycle indicators.”

So where investors put their money at this stage of an economic cycle?

“Yield is important and less risky assets that give this return would include real estate, infrastructure and high yield bonds,” he said.

As for China, Heiligenberg reckons huge foreign currency reserves and low debt will temper falling output and that the world is not heading for another economic crisis just yet.