Michael Power: Global stock market tanking is rational, overdue

One of the advantages of Investec Asset Management's globalisation and continued focus on talent, has been its ability to attract and retain some of the world's best strategists. And they don't come much better than Michael Power – the independently minded global strategist who tipped us off on China long before the pack, and more recently warned Bidvest's acquisition might not be the best deal for Adcock Ingram shareholders. In this brilliant assessment of the latest global market selloff he explains why it's all very rational. – AH  

ALEC HOGG: European stock markets are following what's happening in the Far East, which followed what happened last night (Thursday) on Wall Street. Michael Power from Investec Asset Management joins us on the line. Michael, the volatility appears to have come back with a bang. We had the best day of the year for the American stock market on Wednesday. I'm not sure if it was the worst day of the year, last night (our time) but it certainly is bouncing all over the place. What's caught the imagination of the market?

MICHAEL POWER: Yes, I think some sort of inflexion point. Who knows quite what's going to happen? I don't know, but it doesn't look particularly good at the moment. I think the things that are starting to split the market are the fact that the Central Bankers of the world seem to be running out of ideas. The Europeans are conflicted between the Germans and the ECB – with the ECB wanting to do some sort of Quantitative Easing and the Germans saying 'No', notwithstanding the fact that their own economy now, is flirting with recession. We've seen some other indicators, like commodity prices starting to gap downwards, oil in particular (see right) , which has been fairly resilient until about a month ago, but now down 30+ and of course, there's no real support coming in, in any major/positive way from Asia. It all adds up to quite a worrying situation. Of course, on the top of that we have the strong Dollar, but really, it's not as much a 'strong Dollar' as it is a 'weak everything else'.

ALEC HOGG: Michael, these are all issues that we know about. Bit why in the last two days, has it been so volatile? Indeed, why, after that Janet Yellen-inspired bump on Wall Street Wednesday, have we had such a big sell-off last night?

MICHAEL POWER: Well, you might ask that but other people might ask why it's taking so long for everybody to wake up to what's actually going on and smell the coffee.

The fact of the matter is that not much out there at the moment is positive.

Even when you look into things like US earnings, you find that the entire EPS growth has been manipulated by share buybacks. Since the fourth quarter of 2011 there hasn't been any organic EPS growth in the U.S. stock market and it's been facilitated by share buybacks reducing the denominator.

ALEC HOGG: So a big, deep breath of 'smelling the coffee'. Michael, on another aspect though, resources shares have been hit harder than most. Why would that be?

MICHAEL POWER: To coin a phrase, 'it's a high beater asset' with that strengthening Dollar, with the sense that the global economy is slowing down, and with the fact that there've actually been quite a lot of new supplies that have come on stream in the last 18 months. Think iron ore. All of that has combined and conspired to create a situation, which isn't particularly favourable for natural resources. My own view is that we probably have a three to five-year of lacklustre natural resource performance at a Dollar level before (around 2020) we see a new wave of growth coming out of Asia. This one, inspired mainly from Indonesia and India, is going to drive resource prices up again.