Tensions in the Markets

We trust our readers are not too “green” from any Saint Patrick’s Day celebrations over the weekend and that the luck of the Irish is with you all for the remainder of the week!
Last week was a little rocky in the markets with concerns around the tensions in Ukraine and some weaker than expected data coming out of China which resulted in most markets ending the week down a few percentage points. It’s hard to gauge the political tensions between Europe, Ukraine, and Russia and the extent these effects may have in addition to how long this will last. It will certainly remain in the picture until solutions are found but in the mean time let’s focus on the fundamental data and see what’s happening there.
China was a prominent feature in the news throughout the week as data on retail sales, industrial production, as well as credit and money supply were reported in addition to the wrap of their NPC (National People’s Congress) meeting. The markets didn’t react too kindly to most of the data and the headlines ran amuck with concerns about a hard slowdown in the world’s second largest economy. The Hong Kong Hang Seng ended down -3.2% and dragged along with it commodities and resources, giving back some of the gains they’ve had in recent weeks. However, digging into the data we see that industrial output increased 8.6% in the first two months of the year and retail sales increased 11.8% from the year before. Neither being a bad increase, but nonetheless missed analysts’ expectations and were lower than figures in past years which was enough to drive the headlines and put concerns in the Asia region. Our long term readers know all too well when it comes to expectations that ‘better than expected’ isn’t necessarily good, and vice versa!
So let’s talk about these numbers in retail sales and service data, part of the key gauges of consumer spending, and something that is going to be increasingly important as the services sector now accounts for about 45% of China’s GDP but also accounts for a larger percentage of GDP than manufacturing. Several years ago manufacturing accounted for about 70% of China’s GDP so it’s been a pretty substantial shift although, as we mentioned last week, as China remains one of the world’s largest manufacturers their production data will continue to be looked at intensely. But an 11.8% increase in China retail sales, compared with about a 2.7% increase year on year for US retail sales, (which makes up about 65% of US GDP) seems to paint a different picture than what the stock markets are showing. We’re not saying that these concerns should be ignored, but this simply reinforces the benefit of diversification and continues to encourage us to think about the longer term picture as sometimes these shifts take a while before benefits are seen and as long as the potential remains, then so should investors.
In the US, we’ll see the FED meeting later this week where we can likely expect them to trim another 10 billion from the stimulus measures. Even though there has been some data revision in the US, the data does still indicate growth and the changes aren’t enough to make us think the FED will deviate from their current plan. The S&P was only down -1.7% on the week and as it still remains near peak levels, this movement shouldn’t concern the FED too much.
And in the week ahead, we can expect to see a few data reports but anticipate a lot of attention to remain on the Ukraine and emerging markets in general, as unless developed countries deviate from their current plans, they should see the week through rather unnoticed. However with that said remember to keep a well balanced and diversified portfolio.
For Austen Morris Associates’ investors – talk with your advisor about any repositioning to take advantage of markets at this time. For more information about Austen Morris Associates please visit our website.
Austen Morris Associates Wealth Management & Investment Team