A correction, a sell-off, a crash or a bloodbath – call it what you like, but the Chinese stock market has taken a pounding over the past month. The Shanghai Composite Index is down around 20 per cent since Christmas, testing the lows it set last summer. Well, 2016 is the year of the monkey so some mischief was to be expected.
But contrary to popular opinion, a prolonged correction is not only overdue but will, eventually, result in a stronger market and an improved long-term outlook.
First, though, a dose of reality. China has driven global growth for the past 20 years, which is all well and good when things are running along nicely. Here’s the problem: it’s one thing having an engine for growth, another thing altogether if you don’t know how to fix it when it breaks down. The Chinese economy is driven more by politics than economics, the data it produces unreliable and often manipulated. Global investors – and that means anyone with a pension – have every reason to worry.
The evidence in the region has been worrying for some time. Exports from South Korea, one of the most reliable macroeconomic indicators, have been in steep decline for the last six months. Demand for heavy industrial machinery, another solid indicator, has been pointing to an internal and external crisis – the construction equipment giant Caterpillar has lost a third of its value in the past six months. So it’s not like we weren’t warned.
The opaque nature of China’s economy is reflected in its stock markets, which, outside the Hang Seng in Hong Kong, have attracted speculators like San Francisco once attracted gold prospectors (history is repeating itself there, only the gold is now tech). Chinese speculators have played the markets and are now getting burnt on illiquid stocks that will leave many of them bankrupt. It’s a harsh lesson but one that all emerging markets must learn eventually.
The idea that the world is facing a perfect storm of bearish indicators is gaining steam. Andrew Roberts at Royal Bank of Scotland got himself in the headlines this week with a “sell everything” note to investment clients. “I think my ‘severe downside for the world’ call is looking OK so far,” he wrote. “The fact we are going well is very dangerous for every investor in the world.”
Weak demand for oil and other commodities, currency headwinds and excessive leverage have created what Mr Roberts called a “terrible cocktail.”
The 2008 crash and subsequent recession was largely contained within the financial sector; if Mr Roberts is correct, the next one could make that look like a bubblebath, not a bloodbath.
I’m not so gloomy. While there is no doubt that investors should be very cautious, the Chinese economy has plenty of meat left on its bones. Ridding itself of excessive speculation by private investors and taking some froth off the top will create a more reliable, less volatile market – and give Western investors a louder voice when pushing for greater economic transparency. Both are positive outcomes.
As Bill Mott, for 20 years one of the UK’s most under-rated and under-appreciated fund managers, always used to say that being a good investor is about the ability to see when the future will be different from the past.
This is one of those times. Big oil is in a long-term death spiral and automation will kill millions more jobs. But demand for energy will not die and new jobs will replace old. An economy that is all supply and no demand doesn’t work.
In time, a Chinese economy that is still a long way from its potential will also recover.
Mr Mott was also fond of saying that 99 times out of a hundred, the Armageddon scenario doesn’t happen. Most likely it won’t happen this time. Batten down the hatches, but don’t throw in the towel.
GoPro investors might prefer us to turn off the cameras
GoPro investors turned out to be even less smart than GoPro customers
We have much to thank the company for. Its wearable cameras have given us a lunatic’s-eye view of what it is like to throw yourself off a skyscraper or scrap with a cyclist while on your way to work.
YouTube has even more to be thankful for. Without GoPro, it would have almost no content.
However, this week’s figures are an indication that peak GoPro has passed, and the company itself is in danger of becoming the new BlackBerry.
Wednesday’s after-hours trading update from GoPro was bad enough to reduce the company’s value by 25 per cent when the market reopened. Fourth-quarter revenue, originally forecast by analysts to be as high as $550m (£385m), is expected to come in more like $435m – a 20 per cent shortfall. The company is also getting rid of 7 per cent of its workforce at a cost of up to $10m. The market reaction seems perfectly justified for once.
Investors in GoPro will be nursing some ugly wounds this morning, but they only have themselves to blame. Getting caught up in the hype about a product that only appeals to a limited customer base and paying up to 60 times earnings for the stock… well, that’s asking for trouble. No matter how many times the company re-invents its products, the fact is that most people who desperately wanted a GoPro already have one.
The Hero4, its latest model, was received with utter indifference by customers – to the extent that the company had to cut the price within a few weeks of launch. No amount of watching brainless daredevils attempting to win Darwin awards is going to encourage those who value their own lives to buy one.
And so GoPro will probably survive, but like BlackBerry its salad days are over.
BlackBerry has its niche market – mostly hedge fund types in New York who have doggedly stuck by the original keyboard phone. But in a market that bows to all things Apple, it’s a bit part player at best. The same fate awaits GoPro.
The bottom line is that anyone with a smartphone can make a high-quality video, and, if needs be, buy a waterproof and shockproof casing for it. You might look a little daft wearing it, but not as daft as anyone who paid 60 times earnings for GoPro shares.