Don’t ignore prospects for global growth

Do you happen to have €100 on deposit? If so, its value appreciated by over 20% in one day last week.

That’s if you measure it in Kazakhstani Tenge, the currency of a country with 17 million inhabitants which saw its exchange rate collapse amid a flurry of volatility in financial markets.

The Tenge may be an extreme example, but the key point is that huge levels of price movement has flowed over global equity, debt, commodity and foreign exchange markets in recent weeks and that tempo has got worse in the past seven days.

The Chinese stock exchange fell almost 9% on Monday alone despite a wide variety of measures introduced by government to shore up equity markets.

For now there is a temptation to be imperious in Ireland amid all these changes.

After all, Ireland is a net importer of energy and commodities so lower prices could raise margins for manufacturers while lowering prices for consumers.

Also, the sharp drops in assets prices are largely within emerging markets which are far distant from the UK, eurozone and US where economic momentum remains solid and therefore is helping the Irish economy.

It would, however, be churlish to think the developments of recent weeks are of not profound concern. Ireland, by definition, is a small open economy that relies on global growth for its long term economic health.

Witnessing the declines in Brazilian, Malaysian, Thai and Chinese currencies is an indicator that demand in those economies is faltering.

For some time now we have heard loud arguments that emerging markets were to provide extended periods of outsized demand for everything from iron ore to milk as their economies mushroomed and middle income cohorts expanded dramatically.

Unfortunately, it now seems that some economic data in developing markets is dubious, and debt appears to have played a critical role in driving short-term demand.

As we all know in Ireland, debt-driven economic growth can lead to adverse consequences and we may be seeing some of that in emerging markets currently.

If the developing world is going through a serious setback then it will translate in a number of ways.

1. Large companies with exposure to developing economies will see their budgets come under pressure and that could be reflected in weaker share prices.

2. The euro will appreciate against these developing currencies and that will make it trickier for exporters to stay competitive.

3. Imports from emerging markets will regain a competitive edge as their currencies depreciate.

As this turmoil unfolds, how should individuals and companies behave to best position themselves?

The prospect of economic weakness again raises the risk profile attached to debt.

Individuals and companies who have no debt are best placed to survive and potentially benefit from sharp falls in asset prices.

Those with cash in euro are arguably well positioned to acquire assets at prices that offer long-term value.

For example, a euro investor can now in theory buy a high-quality asset inside Kazakhstan for 20% less than it cost a month ago.

Moreover, in difficult markets, the valuation multiple of assets tends to contract.

After 2008, fine quality companies saw their price earnings ratios decline materially amid market turbulence.

Shrewd buyers stepped in and bought those ahead of recovering economic growth and inflating multiples which helped deliver greater levels of financial returns.

Right now, cash-rich companies with a strategic interest in developing economies should be rubbing their hands as the prospect of acquiring assets for the long term at reasonable prices is growing.

In a decade’s time clever individuals and companies will reflect on periods like this in the same way you can examine 1987, 1997, 2002 and the period after 2008 when great companies and assets changed hands at prices that were bargains in a long-term context.

Joe Gill is director of Corporate Broking with Goodbody Stockbrokers. His views are personal.