World Markets – China, Oil & Geopolitics in a Nutshell (Part 1)

February 23, 2016

By Suresh Rao.

Current market volatility has spooked investors across the board. Developed economies to emerging markets are all looking for a direction in terms of world economy. Most of the volatility is attributed to the slowdownof the Chinese economy, oil prices and increasing in Fed rates. However, the role of global geopolitical tensions and lack of global leadership in the present global scenario have been equally important, as taught in many financial courses in India.


Lets have Chinese for starters – There is a long-standing argument about whether stock markets are a true reflection of economic progress or recession. To put this into perspective, India is pegged to grow at +7% and there is a huge positive sentiment in the market, however the Chinese economy is pegged at about 6-6.5% and there seems to be a disaster. Being the second largest economy in the world growing at 6% is great news to anyone, however, still lower than the high of 9% growth it achieved over the past years. Clearly there is a slowdown but it is more attributed to adjustments in Chinese economy. There is conclusive evidence that there are huge disconnects between economic fundamentals and market malaise. Having said this, the mounting debt on the books of banks is one of least confidence building data points for the Chinese economy.


The composite PMI indicator for manufacturing and services slipped back last month but it is higher in the summer.  The risk is that this market storm drags on long enough to hit investment, regardless of what the economic data should imply. At the end of the day, as any of the online finance courses would say, market psychology can itself become a key economic fundamental.

One of the big reforms one should expect is for the Chinese government to strengthen their financial and stock markets and brings transparency on data reporting. This gives an impression that the Chinese economy is still not mature or well controlled compared to the western counterparts. Some of the market volatility seen last month is focusing back on banks & its book quality. A big part of the problem is large NPAs not just in China but across European banks andemerging market books.


The main course is drenched in oil – Why is low oil price is bad news for the world at large contrary to an Indian view that this will fuel its economic growth? Oil price movements are the result of three factors:

  • Changes in oil supply,
  • Changes in the importance of oil in the economy
  • Changes in the global economic climate.


The entire scenario can be classified into two groups–


Oil exporting countries like Russia, the Gulf and Latin America are in serious crisis with low prices which has propel these countries to cut back on their subsidies. Further to add to the crisis is the politics of these countries collectively against US shale production. To make things worse, Iran has been included in the oil cartel.


As we know, oil exporting countries will now have to rely on oil- importing countries like China, India and other world countries to prop up the demand. Over the last couple of decades, one of the important factors of high oil prices is due to high demand from China along with other emerging markets. The fact that the China is adjusting its economic fabric has created an oil glut in the market. As stated earlier, China is reeling under low demand and low industry growth. This does not give any good news to the overall world economy.  India needs to play its cards with continuous reform measures and take maximum advantage of low commodity prices.


Too Many Cooks Spoil– Geopolitics

Major & renowned economists, large research houses, rating agencies, financial analyst course and central bankers are struggling to predict the economic conditions this year and the next. The smartest guys can build great models, carry out fundamental, technical analysis & predict an outcome but no model can predict the erratic behavior of human beings in the form of politics.


Why is predicting getting more difficult than ever before? – One of the biggest reasons is Geopolitics played out in every complex Middle East, Korea, Europe & the US.


Markets even in a slump need consistency and predictability of the events. Some of the events over the last 2 years and the political situations in major world economies have given nightmares to major analyst across the world.


Key geopolitical issues arising out of ever complicated Middle East scenario attributing to ISIS, Sunnis, Shias, Kurds, Yazidis, has split the world in to two half – Syria, US, Europe & Russia. One of the biggest migration since the World War II from Middle east to Europe has put enormous pressure on European economy and has only added social tensions to an already fragile economy. US holds elections in 2016 and there is no clear winner. This has added enormous pressure on the Fed to act proactively on the world economic challenges.

Unpredictability of North Korean regime would further aggravate tensions where  countries like China, South Korea, Japan and US will be dragged to get a solution for the problem.


To summarize, let us answer a crucial question: Are we in a similar situation like in 2008? Certainly not! The given situation is quite different and banks are better position than before. However, let us not forget we have Chinese, Oil, and Geopolitics to sort and more importantly there are hardly any new tools available in the market as we have printed enough artificial money across US, Europe, China and Japan. Let us sit tight and hold on to our cash and hope that this storm too shall pass.


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