Gadarene rush

Equity investors succumb too willingly to gloom

Equity investors are suffering from negativity bias. After bad Chinese economic news, and sliding currencies in emerging market manufacturing powerhouses, they have succumbed to gloom too willingly.

China’s factory sector shrank at its fastest rate in more than six years, a managers’ survey showed on August 21. Asian bourses fell and the FTSEurofirst 300 index of shares hit seven-month lows immediately after the open. Every sector was in negative territory at one point. UK, French and German stocks have now shed half or more of the gains they made earlier this year.

True, slowing growth in Asian emerging economies is a good reason to sell certain companies. Reduced Chinese growth depresses demand for raw materials and weighs on commodity prices. Oil prices are on track for their longest losing streak in nearly three decades. This naturally hurts energy and mining firms. Weakening Asian currencies also pose competitive challenges to export rivals in the West, for example in the automotive sector.
 

What makes less sense is the indiscriminate nature of the selling. The STOXX Europe 600 index has shed 6.6 per cent so far this month, not that much less than the 8.3 per cent shed by the energy sector or the 9.2 per cent drop in basic resources. Also, while China’s contribution to large German companies’ sales is nine percent, and the contribution to earnings a more chunky 15 per cent, according to Deutsche Bank, it is far from obvious why concerns about Asian growth would justify the sell-offs of US- and Europe-focused pharmaceutical and healthcare companies.

The reality is that growth in developed economies remains fairly healthy. Euro zone business growth unexpectedly accelerated in August, according to a survey published on August 21. Falling energy prices leaves households with more money to spend on other goods and services. Companies which buy raw materials benefit, even as those that dig them up suffer. Buying winners cheaply in falling markets can be lucrative, but only once the fog has started to lift.