Peter's Perspective
25th August 2015 by Peter Churchouse

A Correction Not A Crash

Let’s see, what do we have so far…

Feverish, panic-stricken headlines in the financial media?

Stock photos of investors and traders standing in front of illuminated electronic stock ticker boards holding their heads / their faces in their palms?

Minute-by-minute market coverage finding its way into the mainstream media?

Given the name of this free newsletter is Peter’s Perspective, we’re going to try and give you just that. Some perspective.

And where to start? Where else?


Thirty five years ago, China’s economy was irrelevant in the global context.

As recently as ten years ago, China’s economic growth had put it in a position where its economy was a function of trends in the global economy.

Today, it has got to a point where the Global economy increasingly seems to be a function of events and trends in the China economy.

The global economy and global markets have a “Made in China” label on them.

Central bank polices in the west also carry the same label now as well. Why? How the Chinese economy and currency fares over the coming months will substantially affect the Fed’s rate decisions.

The upshot of this is that investors who have felt able to quietly ignore what happens in China and Asia generally are in for a rude awakening.

It is becoming even more critical that investors get to grips with what is going to drive these economies and their own markets in the US, Europe and elsewhere.

We constantly talk of how it’s an interconnected world we live in.

Well, it is, and that interconnectedness is not just an abstract concept. It impacts your financial health no matter where you are.

You cannot shove your investment head in the sand anymore and pretend what happens halfway around the world doesn’t really matter to me in Wisconsin, Walton, Woolongong, Winterthur or Wellington.

Ignore China and Asia at the peril of your investment wealth.

Markets have been nervous for a couple of months. We recognized China’s market had gone full bubble by mid-June (“This Is A Bubble”).

But it took China’s change in FX regime to act as the catalyst to turn simple nervousness to selling action around the world.

This has been exacerbated by poor business activity numbers in China, a cratering oil price, and continued emerging market outflows.

What amazes me is that every time we see a substantial market correction, the response is as though this is the first ever correction mankind has seen!

Hong Kong’s Hang Seng Index saw a 34% correction back in 2011.

Thailand? A 25% correction in 2013. Korea? Down 24% in just a couple months in 2013. Indonesia? Same, 25% to the downside in 2013.

And Japan has seen double digit corrections each of the past 4 years!

As for the U.S., we argued a correction was long overdue (the June 2015 edition of our premium publication The Churchouse LetterInclement Weather Inbound” was purely focused on what to own during a U.S. correction – our recommendation for preparing for a correction is currently outperforming the S&P500 by 4.7%).

These corrections are a healthy component of properly functioning global markets. It’s not pretty, but it’s essential.

So what’s the conclusion for the moment?

  1. China growth is slowing. Simple. And coupling this with a continued gradualist opening of its capital market will result in bouts of volatility. China is NOT on the verge of collapse. But given the transition it is going through, you have to expect some skeletons in this US$10 trillion economy’s closets to come rattling out. And expect more aggressive easing policies!
  2. The U.S. has only seen one semi-serious correction since the financial crisis. It’s about time there was some re-pricing of the market over there!
  3. Emerging Markets as an asset class will continue to struggle. But there are bright spots we like (the Philippines and Vietnam to name two). Differentiation is critical. This reminds me of a piece we wrote a couple years ago (“Not All Emerging Markets are Turkeys”).
  4. There will be bargains!!! It’s going to be tough in some sectors (think oil, mining, commodities in general, countries with large current account deficits etc…), but I’m seeing some great companies with no debt, nice dividend yields, reporting great earnings and trading at single digit multiples on my screens. We’ll be talking about those more The Churchouse Letter.

And finally, please make sure you action your stop losses!!! If you need any further proof of how important this is, then just read this Peter’s Perspective (“An Ounce of Prevention“) from last month.

It addresses a reader who was second-guessing his stop loss on the Hong Kong index. Well, since then the market has fallen by another 14%…

Good investing,


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