August 31, 2015

Opportunities in the Midst of Volatility

Last week saw some volatility in the US markets, with the S&P 500 functioning like a seesaw. The week of 8/24 started off down 5% between the previous Friday’s close and Tuesday’s close, but then rallied between Tuesday’s close and Friday’s close. All-in, the week closed up almost 1% from the previous week’s close.

So what drove the volatility, particularly the rally as the week progressed? The Bureau of Economic Analysis released a revised second quarter GDP of 3.7% for the United States, beating the forecasted uptick of 3.2%. Personal consumption was up a healthy 3.1%.  

We believe that fundamentals in the US are generally sound. The most recent housing starts data released by the US Census Bureau revealed that month-to-month July housing starts were up 0.2% and year-over-year starts were up 10.1%. Consumer spending, which drives about 70% of the US economy, rose 0.3% for July, while disposable personal income rose 0.5%. Core PCE prices (excluding food and energy) increased 0.1%.

Speculation continues as to whether the US Fed will increase rates in September. We believe that this is highly unlikely. Consumer spending has not gotten out of hand, with the US personal savings rate ticking up to 4.9% in July, up from 4.7% in June. And, as we noted, core PCE prices (a measure of inflation) is minimal. Moreover, the dollar continues to remain strong: a rate hike will only further strengthen an already strong dollar, leading to further weakening and devaluation of other currencies. We are very much a one-world economy now.

To offset the devaluation of the yuan, China sold from its stockpile of US Treasuries last week. Estimates suggest that China controls about $1.48 trillion of US government debt. Our understanding is that China sells its US Treasuries to the market in USD, and then uses those dollars to buy back the yuan, driving up demand for the yuan and strengthening the yuan relative to the USD. We find it unlikely that these actions by the Chinese government to stabilize their currency will be the driver for the Fed to increase rates in September. The effect, if any, will be through the currency channel where the dollar will be weaker.

So again we ask what are the implications of all this for Africa and the global frontier markets? Local currencies and valuations have come down nicely, suggesting nice long-term opportunities for US investors, which active managers like Nile Capital Management are well-positioned to take advantage of. We believe this is an ideal time to allocate to frontier and emerging markets.

The views expressed are opinions subject to change and are not investment advice

Nile Capital Management
We Know Africa: From Cairo to Cape Town
For more information please call 646-367-2820


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