For Investors, Uncertainty Reigns

Investment professionals have had ample reason to reach for the antacids in the past week.

Globally, things are a mess. What was a Chinese stock bubble has turned into a test of the depth and breadth of the Chinese government’s influence. Can China keep the market from cratering despite panicky bubble-conscious investors looking for an exit? Who knows? But the ultimate answer will say a lot not only about the future of the Chinese economy, but also about the Chinese government’s ability to direct and manage it. However it plays out, the recent volatility will likely be around for a while.

In the European Union, the high-minded and vaguely Utopian aspirations that have been a feature of the eurozone since its creation gave way to an arch display of realpolitik, as the Greeks and their recently elected prime minister Alexis Tsipras received a rather brutal financial drubbing at the hands of Germany and their other eurozone partners.

Elected six months ago on an anti-austerity platform, Tsipras had vowed a more confrontational approach in debt negotiations with the troika of the European Central Bank (ECB), International Money Fund (IMF), and the European Commission. He delivered on that pledge, using a potential Grexit as leverage in talks. His major gambit: holding a national referendum to approve a new bailout from the European Union that included another round of austerity measures. Understandably, the Greeks, who now suffer from more than 25% unemployment and have seen their GDP shrink by roughly 25% in the last eight years, were less than anxious to endure another round of debilitating tax increases and budget and benefit cuts. So Greek citizens did what Tsipras wanted them to do — 61% voted to reject the offer.

This set the stage for a potential Grexit. The question was would the Germans let it go that far or agree to more debt relief. As Greek banks limited withdrawals and the country descended further into the economic abyss, the Germans more than held their ground and, in fact, doubled down, seemingly reconciled to Greece potentially leaving the euro and whatever fallout that would follow. Far from offering anything more palatable to the Greeks, they instead proposed a deal even harsher than the one that the Greeks had just rejected.

“Germany has, for perhaps the first time since reunification, in 1990, blatantly exerted its power on the European stage,” John Cassidy wrote.  As for the $96-billion bailout agreement, “[It] is perhaps the most intrusive and demanding contract between an advanced nation and its creditors since the Second World War.”

Nevertheless, a chastened Tsipras gave in, acquiescing to German demands. He had apparently not prepared an alternate strategy, whether for a Grexit or something else. It seemed he had been bluffing the whole time. Unknown are the long-term effects on the Greek population, elements of which are already rioting.

But the situation in Greece is not the only recent political development to have investors rightly concerned. The multilateral nuclear deal with Iran has investors wondering how oil prices will be impacted. Once Iran begins exporting, analysts estimate they could potentially increase production to 4-million barrels per day (bpd). With current global oil demand at just about 96-million bpd, that would constitute an over 4% boost in supply. Regardless of the merits of the agreement or whether it is ever, in fact, approved and implemented, should the oil sanctions against Iran be dropped as the deal dictates, Iranian oil will effectively flood an already glutted market. What would constitute rock bottom for oil prices then? That’s anybody’s guess.

In the United States meanwhile, the perennial uncertainty as to when the US Federal Reserve will raise interest rates continues to bedevil investors. Fed chair Janet Yellen told Congress that the Fed is poised to increase rates before the end of the year, assuming the US economy remains on track. Of course, the Fed has sent similar signals many times over the last several years and rates have remained close to zero.

With all of the turmoil this week, we thought it a good time to query CFA Institute Financial Newsbrief readers about the one thing that has worried them the most in recent days.

Poll: With respect to investments, which of the following caused you the most concern within the past week?

A large plurality (45%) of our 647 participants selected the volatility in the Chinese stock market as their chief concern. The ongoing turmoil in Greece came in a robust second, with roughly 25% ranking it as their primary worry. Falling oil prices and uncertainty about Fed polices came in at 7% and 8%, respectively. Another issue that popped up that has failed to generate the same sort of headlines was reduced bond market liquidity, which was the leading concern of 15% of respondents .

Indeed, despite Fed assurances to the contrary, many investors — Bill Gross, CFA, and Howard Marks, CFA, among them — see bond market liquidity potentially drying up and are concerned about how it may impact prices. Gross’s advice? Hold on to cash.

In the end, the primary lesson of the poll is that for the global economy, wherever investors look — from Europe, to China, to the United States — uncertainty abounds.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.