As you will have seen from the headlines, financial markets have had a miserable start to the year. There has been a coalescence of uncertainty in the opening days of 2016 - most dramatically reflected in the recent turbulence in China (and elsewhere) as investors focus on a range of issues, such as:

• The wider impact on emerging/ developing economies of continuing dull growth in industrialised economies. In effect, this has resulted in a persistent over-supply of oil and other commodities, and of manufactured goods (the latter is also a consequence of the longer-term trend of globalisation).
• The short- to medium-term outlook for the Chinese economy – on this, we have long been of the view that China’s growth has been slowing.
• The negative consequences for the Chinese stock market of previous margin-financed flows into equities, with much of that investment being undertaken by very unsophisticated private investors.
• The policy response of the Chinese authorities to slowing growth and financial market problems. With regard to the former, it would seem that China may be happy to allow the renminbi to depreciate in order to stimulate exports – a policy that could trigger similar action by other central banks. The authorities would appear now to be re-thinking the use of circuit breakers to manage selling pressures within the Chinese stock market.
• The exposure of UK and other western banks to problems in China and other emerging economies.
• Oil being used as a political tool in the Middle East – alongside wider concerns about political instability in the region.
• The deflationary impact on the West of falling import prices. Our view remains that falling prices of energy, food and some manufactured goods are not deflationary, and actually give rise to a real income/demand boost to western consumers.
• The short-term implications of rising US interest rates – on this subject, we do not think the extent of tightening likely in the US will have a meaningful impact on domestic demand.

While a loss of confidence could damage growth in economies such as the UK, we do not believe that industrial economies will grow significantly less quickly in 2016 than in 2015. Indeed, we could see slightly stronger growth in the eurozone and Japan, accompanied by maintained momentum in the US and UK. The present rates of growth may be dull when set against the more ‘exciting’ (but eventually self-destructing) rates that were ‘enjoyed’ prior to the great recession. The financial system, while not fully healed, is a good deal more resilient than it was five years ago.

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