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In Hasty Judgments And Exaggerations Lie Investment Opportunities

  • The key unknown now is not macro economic data but the intentions of policy makers.
  • The yuan is hardly weak, it is simply slightly less strong.
  • The underlying fundamentals have not changed. The market correction will offer a new opportunity to get with the macro-driven trends.

China's Premier Zhou Enlai was asked in 1972 about the political consequence of the French Revolution, and he famously quipped it was too early to say. Even if, as historians recognize, Zhou was referring to the unrest in 1968 rather than the 1789-1799 revolution, it offers insight that is too valuable to let the facts distort.

Indeed, that insight offers good counsel now. While there is no substitute for prudent and disciplined risk management, we should avoid jumping to hasty conclusions drawn from the volatile price action.

Markets are incredible aggregators of information. They are also anticipatory by their very nature. However, they do not always anticipate correctly, they often overshoot, and can transition quickly from a small gradual adjustment to a lurch, with little if any warning.

Markets are prone to exaggeration. Many participants appear to believe that the 2.8% decline in the yuan is some kind of watershed for the world economy. It, more than any other factor, has been blamed for the large sell-off in global equities. To wit Bloomberg: " More than $3.3 trillion has been erased from the value of global equities after China's decision to devalue its currency spurred a wave of selling across emerging markets."

The yuan has fallen 2.8% since the announcement on August 11, and that was recorded mostly in the first couple of sessions. Last week, as the stock market tumbled, the yuan traded sideways, and if anything, firmed slightly. The magnitude of the yuan's decline is too small to have much impact on Chinese exports. This, of course, can change going forward, but there is no reason to think that it is particularly likely. The IMF and the US embrace what PBOC said it is going to do. Their caution is prompted by concerns that China will not enthusiastically implement its verbal declarations.