Bill Jamieson: Share price horror show has Far East roots

China was the reason for the worldwide plunge in stocks. Picture: Getty Images
China was the reason for the worldwide plunge in stocks. Picture: Getty Images
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Barely had the ink dried on those predictions of 2016 being a same-again, little-change year than global markets suffered a torrid start.

More than $2.3 trillion was wiped off the value of shares worldwide last week, the worst start to the year for global markets in more than two decades.

The catalyst for this plunge was, once again, China. Relaxation of government controls on selling large lines of shares encouraged a rush to offload, followed by the application of circuit breakers which halted trading. It is a moot point whether these work to calm markets or heighten volatility.

All this leaves searching questions as to the fresh evidence of economic slowdown – poorer manufacturing and services data – and whether, given the sensitivity of markets around the world to volatile movements in one country, geographic diversification really works to protect investors.

There is good cause to be apprehensive. A global economic slowdown is already evident. Anything that further upsets sentiment and confidence would exacerbate this.

However, some less alarming news was overlooked. Chinese stocks closed on Friday still higher than the low points reached last summer. From America came news that non-farm payrolls were better than expected. And average hourly earnings are rising at 2.5 per cent, which should help sustain consumer spending in the period ahead.

And in Europe Fresh data the signs continue to improve, with eurozone manufacturers in a notably positive mood. The European Central Bank is continuing with economic stimulus efforts in the conviction that higher growth is the most effective address to persistent high unemployment and government deficits. Yet here, too, encouraging news was swamped by worries over market gyrations in Shanghai.

A restoration of calm in China should allow for a broader view to be taken on market prospects. That does not mean an end to market apprehensions, still less the return of a bull market. But steadier conditions should allow for a more thoughtful appraisal of opportunities and threats.

Arguably of greater concern for investors is the disruptive effects of the digital revolution on business models and company earnings. The benefits of technological change are colossal. But for many companies it presents a fundamental threat. I was particularly struck by a tour de force presentation last week by investment guru James Anderson of the giant Scottish Mortgage Investment Trust that 69 of the world’s 100 biggest stock market companies “face doom in the next ten years”.

Now Anderson is a futurology iconoclast. Don’t expect the soothing bromides of a conventional investment manager. Many fund managers in his view – particularly the index-huggers – have failed to grasp the significance of the changes now unfolding.

“We live in a completely different world than we did 12 months ago”, he told an audience of investors and stockbrokers in London that conventional economic measures such as GDP are failing to capture what is really going on. Sixty-nine of the world’s 100 biggest stock market companies, he predicts, “face doom in the next ten years” as a result of the revolutions sweeping the energy, healthcare, transport and communications sectors.

The China slowdown may be hogging investor attention. But it is the continued slide in the oil price, changes in energy economics, the relentless advance in digital commerce and developments in genomics that will have profound impacts on the corporate world as we know it.

He argues that 2015 had seen “the end of fossil fuels”: a combination of Saudi Arabia and Opec countries forcing oil below $40 a barrel while the price of lithium batteries had become cheaper, heralding a revolution in renewable energy as it would become practical for people and companies to store solar and wind power.

Anderson, co-manager of Baillie Gifford’s flagship £3.3 billion investment trust, also had a dramatic prediction for Amazon, the e-commerce pioneer and Scottish Mortgage’s biggest investment, accounting for 10 per cent of the fund’s assets. The shares have doubled in the past year to $608, but Anderson and colleagues have a “top side” valuation of $4,000 a share. This was based on an assumption of e-commerce taking 15% of retail sales, with Amazon accounting for half of this.

A fund manager talking his own book – wow, how strange is that? But the success of Scottish Mortgage in backing digital technology winners and avoiding oil stocks has made Anderson one of Britain’s top investment gurus and, as I can vouch from attending his roadshows in Edinburgh, a compelling speaker.

In predicting that these changes will bring “creative destruction” effects on many of today’s global high fliers, he carries an important message for all investors.