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OPINION

Dry January

Dry January
February 14, 2019
Dry January

Yet, as our diarist and self-confessed optimist John Rosier notes in his column this month, markets have roared back to life in January. Having only just emerged from a long hibernation, bears have been sent scuttling back into their dens. As Alex Newman writes in this week’s Taking Stock column, many of the world’s largest investment firms have brushed the December wobble under the carpet and quickly resumed their bullish commentary on the outlook for global equities. 

They may be playing to the crowd. For the many who experienced a grizzly battering in December, this will have come as welcome respite, and those who didn’t panic sell will have been able to pare back some of their heavy winter losses. The online conversation among private investors has notably shifted from abject misery to merriment. 

Yet we should be wary that it does not escalate into mania. As Simon Thompson accurately predicted in his first column of 2019 – and reiterated on our weekly podcast – the suspension of monetary tightening in the US has been largely responsible for this bounceback. The strength with which markets have responded to the Fed’s decision shows just how hooked we have become on stimulus. And like the last drink at 3am, while it may seem enjoyable at the time, it pays not to think about the heavy price to be paid the next morning.

One binge that might reach a messy conclusion is China’s decade-long post-crisis debt surge, the subject of this week’s cover feature. To keep the story of its economic miracle alive, Chinese lenders have dished out trillions of dollars to households and businesses over the past decade, in the belief that such mountainous levels of borrowing could be sustained by the country’s continuing rapid growth. 

But that belief is looking increasingly questionable, not least because the trade stand-off with the US has revealed an unexpected fragility to China’s economy. And even if its official GDP statistics still look mighty, read-across elsewhere is casting serious doubts as to what may be happening under the bonnet, not least the slowdown in output seen in the country’s key trading partners. In Germany, whose biggest customer is China, industrial production has slumped in recent months. And as The Trader explores this week, the Baltic Dry Index, which tracks the cost of shipping raw materials, has slumped; that tells us that global economic activity is faltering, with China – the world’s biggest bulk material importer – at the root of the slowdown. 

As the recent sales slump at Jaguar Landrover highlights, UK companies are not immune to this contraction, either. For those investors cheering the January rebound, that interconnectedness is a sobering prospect.