John Chatfeild-Roberts: Patience is key as China dust settles


It seems a long time ago now that investors were worrying about Greece. The  date of 24 August is being described as China’s Black Monday, although the original Black Monday, in October 1987, was much more severe. Back then the Dow Jones Industrial Average shed 22.6 per cent in a day. Nevertheless, the recent market fallout has been dramatic, with share prices tumbling all over the world.

At such times of heightened emotion, it is more important than ever to exercise patience as an investor. These are times to take a deep breath and take stock of where things stand. Has reality actually changed or is it just perception that has shifted?

China’s published 7 per cent GDP growth rate for the first half seems increasingly implausible, though it is important to remember that its economy is actually still growing, not shrinking. Other data, including imports and exports, as well as the purchasing managers’ surveys, point to lower economic activity than that reported.

Major international companies including BMW, Volkswagen, Burberry, BASF, Siemens and Caterpillar have all reported increasingly challenging trading conditions in China. The knock-on effects for the rest of Asia and more broadly are being felt right now.

Commodity prices, which temporarily stabilised in the second quarter (notably oil, iron ore, copper and gold), have once again weakened significantly. All have suffered directly or indirectly as a result of China’s sluggish activity. What is more, being priced in dollars, all have been affected by the recent strengthening in that currency thanks to markets anticipating US interest rate rises later this year.

The oil price (Brent has fallen about 28 per cent since the end of June) suffered the additional burden of Saudi Arabia continuing to produce at record levels. This strategy may seem illogical and counterintuitive, especially when global crude inventories are already so high.

However, Saudi’s motivations are partly to help fund its budget deficit, countering weaker prices with increased volumes, and partly to demonstrate to its competitors that, while it may no longer be the world’s largest crude producer, it still has significant clout to influence oil markets in its own interests.

This must be seen particularly in the light of the Iranian nuclear containment treaty, signed in July with the West, which could pave the way for economic sanctions against Iran to be lifted and for the country eventually to resume exporting oil.

The recent market volatility has raised the question of whether those predicting interest rate rises in the near future will be proved wrong.

In July there was little surprise that both the Bank of England and the US Federal Reserve pointed towards rate rises before the turn of the year. Both indicated that rises are likely to be in small, incremental steps, with the BoE suggesting around 2.5 per cent as “the new normal”. But rising rates historically have tended to cause their related currencies to appreciate. If the US dollar were to appreciate further it would keep pressure on global commodity prices for some time yet.

Given the recent market falls, it seems less likely the Fed will raise rates this month as some had expected.

Ultimately, however, only time will tell. Certainly, on the whole, economic conditions continue to improve in both the UK and US, much of which is reflected in tightening labour markets and wage inflation: key determinants of current interest rate policy.

The return of the unearned income surcharge

On a side note, July’s summer Budget proved a dismal affair for many investors. In 1997, in his first Budget as Chancellor, Labour’s Gordon Brown abolished advanced corporation tax for pension funds, thereby removing their ability to recover tax credits on dividends.

Now, George Osborne is skinning the cat another way by increasing personal taxation on dividends by 7.5 percentage points over the taxpayer’s own current dividend tax rate. This applies to any individual’s aggregate annual dividend income in excess of £5,000.

This looks to us like the Conservative reintroduction of that old 1970s Labour chestnut, the unearned income surcharge. Recent pension reforms and low annuity rates have forced many savers to seek supplementary income elsewhere for their retirement, including from dividends. This additional tax burden does not help.

Other new measures also limit mortgage interest and maintenance expenditure taxation reliefs in the buy-to-let sector. These might be more difficult to argue with but investors who have sought to diversify by investing in rental property as well as in equities have suffered a painful and unexpected double whammy. We hope this is not a sign of things to come.

John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management.