Friday, August 21, 2015

China worries script worst week for markets in years; Fears of a 1997 repeat in Asia; A $870bn fund learns to use its clout

1 China worries lead to worst week for markets in years (San Francisco Chronicle) Growing concerns about a slowdown in China shook markets around the world on Friday, driving the US stock market to its biggest drop in nearly four years.

The rout started in Asia and quickly spread to Europe, battering major markets in Germany and France. In the US, the selling started early and never let up. Investors ditched beaten-down oil companies, as well as Netflix, Apple and other technology darlings. Oil plunged below $40 for the first time since the financial crisis, and government bonds rallied as investors raced into hiding spots.

"Investors are wondering if growth isn't coming from the US or China, where is it going to come from?" said Tim Courtney, chief investment officer of Exencial Wealth Advisors. "This is about growth."

By the time it was over, the Standard and Poor's 500 index had lost 5.8 percent for the week, its worst weekly slump since 2011. That leaves the main benchmark for US investments 7.7 percent below its all-time high — within shooting range of what traders call a "correction," a 10 percent drop from a peak. The Dow Jones industrial average fell 530.94 points, or 3.1 percent, to 16,459.75. That's 10 percent off its high, a correction.

For all the markets’ jitters, many economists say they remain confident that the US economy is resilient enough to withstand a slowdown in the developing world. And Europe's economy appears to be emerging from its long slump.

2 Fears of a 1997 repeat in Asia (Karishma Vaswani & Robert Peston on BBC) Emerging markets' currencies tumbling to near record lows. Millions of dollars’ worth of foreign funds pulled out of stock markets in the region. And some investors around the world fearing a major financial meltdown. It certainly feels like we've been here before.

Many in Asia's financial circles are calling this a re-run of the 1997-1998 Asian financial crisis. The meltdown in Asia was set off when Thailand floated the baht in 1997, setting off a domino effect in the region where one by one, currencies fell against the US dollar. Today, many are worried that China's devaluation last week could set off a similar trend.

Emerging markets are in a far stronger position than they were back in 1997-98. They have stronger current account balances, higher foreign exchange reserves and mostly floating as opposed to fixed exchange rates - which means they don't have to be defended from speculative attacks.

The other factor to consider is India's economy - it now claims higher growth than China's (although many analysts have questioned how those figures have been calculated) and its stock exchange - the Sensex - has seen record inflows in the last six months, attracting investors who have fled from the volatility in Chinese shares.

So it could provide an alternative engine for global growth, if the government's figures are to be believed. So that's all good news - and should have investors and policy-makers breathing a sigh of relief.

Daily stock market fluctuations in a highly connected and globalised world are to be expected, but they shouldn't necessarily be seen as the beginning of the end of the world. What we should be paying more attention to, perhaps, is whether there are long lines outside of our banks and supermarkets. Now that's what you call a crisis.

3 A $870bn fund learns to use its clout (Richard Milne in Financial Times/Gulf News) Yngve Slyngstad is something of a corporate philosopher. Slyngstad, who heads Norway’s oil fund, the world’s largest sovereign wealth fund, is not merely content with trying to make more money for the local population. He is also thinking deeply about how companies and markets work.

“Where do we actually see the public company going forward? How can we make sure that the public company is actually able to put together a profitable proposition and appropriate flexibility in the way they run their business?” he says in an interview in his office in Norway’s central bank, which manages the fund.

Underlying all this is the extraordinary scale of the oil fund. Less than two decades old, it has experienced a particular growth spurt in the past 10 years as its assets have grown sevenfold to $870 billion. Its size can be difficult to comprehend — it has stakes in almost 10,000 companies and on average owns 1.3 per cent of every group listed on a stock market globally.

However, with this power comes responsibility. The size of the fund’s stakes in many companies means it has been forced to jettison its insistence that it is a mere financial investor and take a more active ownership role and focus on corporate governance. In the past two years the oil fund has moved to becoming an active investor in at least three different ways.

First, it has started revealing its voting intentions at annual meetings. Currently, it discloses how it voted the day after the meeting. Second, the fund is issuing “position papers” setting out its corporate governance principles. So far it has only released two — on proxy access and the ability to vote on individual directors — but Slyngstad says it should be 20 by the end of next year.

The third area of engagement has been more local. Under the Nordic model of governance, a company’s largest shareholders often sit in the nomination committee that decides who the board members will be. After years of declining to join them, the oil fund signed up in 2013 to its first two: truck maker Volvo and paper company SCA, both in Sweden.

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