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Commentary on financial market developments

Highlights:

  • US: waiting for interest rates to rise and the outcome of the presidential election
  • China: GDP develops in line with expectations

Changes in selected stock indices and commodities:

Note: US: S&P 500, Europe: BE 500 inx, Japan: Nikkei 225, Brazil: Ibovespa, Russia: RTS, India: NIFTY, China: Shanghai Composite, Africa+Middle East: GCC 200, South Africa: JSE TOP 40, Australia: ASX 300, Gold and Oil

Commentary:

Uncertainty surrounding the future fate of Deutsche Bank peaked in late September and early October. The US Department of Justice will eventually fine the bank between USD 4-5 billion for collusion in the mortgage securities market before the financial crisis. This is significantly less than the original USD 14 billion that would likely have been liquidating for the bank. Deutsche Bank shares firmed from €10 to around €13 per share during October.

In the US, the stock market is moving mostly sideways. Overall, however, US equities lost slightly in October. Waiting for monetary tightening is to blame, as investors cannot know when exactly interest rates will be raised. Another unknown is the outcome of the presidential election. Previously favoured Hillary Clinton has been losing ground in recent days due to a scandal involving the use of a private email account for work purposes, which may have put the country’s security at risk. In the end, the US election may turn out to be a thrilling spectacle, which keeps investors on their toes.

China’s economy is growing in line with the government’s plan. The Chinese government’s target for this year is economic growth of 6.5-7%. In particular, loose monetary policy, infrastructure spending and the provision of car subsidies are all positive. The Chinese economy is changing significantly, with wages continuing to rise and the service sector growing. It is gradually evolving from a manufacturing-exporting country to an increasingly advanced economy with strong domestic consumption. This was reflected in October’s -10% year-on-year fall in exports! In addition, the Chinese economy is struggling with a high debt level and the risk of a possible bubble bursting in the property market.

How the world’s richest people invest:

Today’s reflection on investing was inspired by the Bloomberg Billionaires Index. The latter released a report that Alexei Mordashov has become the richest person in Russia, replacing Vladimir Pontanin at the top. The report itself is not important, but it is illustrated with an interesting chart.

If we think while interpreting the chart, we find out some interesting things that can inspire us in managing our own wealth…

⦁ Wealthy people invest in stocks and in business in general

The high volatility of the total wealth values shown in the chart clearly shows that wealthy people invest in companies that they either directly control or hold their stock in. In general, rich people invest a larger percentage of their wealth in stocks (business) than the middle class.

⦁ The value of wealth is constantly changing

We can also see from the chart that the total value of wealth is constantly fluctuating. Even billionaires do not live in a stable environment. Even their assets are subject to market risk. Another common misconception people have is that the price of real estate is stable. That is not true either. Only real estate doesn’t trade every day like stocks do, so we just don’t see changes in the price of the property we own. We only find out the market price when we try to sell the property.

⦁ Property values sometimes fall

Many of us small investors panic when the value of our property starts to fall. However, this is a normal occurrence that happens. The price environment is always volatile, the clash between supply and demand is a constant living process. Many unstable factors enter into it, such as human needs, expectations, moods, hysteria and panic. Wealthy people diversify more, they take market risk into account, and so they just hold as many types of assets as possible to protect them from fluctuations.

It would be interesting to have an up-to-date chart of the value of their own assets. We might be surprised at how volatile it is. That not only stock prices change, but also the value of the real estate we own, that the value of a car is constantly decreasing, that our human capital (the sum of all future income from employment/business) is decreasing as we age. Perhaps then we would be more aware of the pervasive risk we are surrounded by, which we can only manage knowing that we will never fully eliminate it.

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