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Seeing red


If your board or key executives are fretting about your share price (or private company valuation) so far this year, you are not alone. At time of writing, stock markets around the world are seeing their worst start to the year in decades. The European STOXX 600 index is down 11%, the S&P500 down 8%, and the MSCI China index is down 15%.  Intel is down 8% after announcing weak results, citing Chinese demand as a reason. Public company execs should be aware of the issues. Use your broker or investment banker to keep abreast of how the market is positioned so that investor communication can be tuned appropriately. Avoid delaying or covering up bad news if it is out there. If you are negatively impacted by the falling oil price, or have China, the Middle East, or have an oil producing country as a major part of your revenues, this should be old news.

Five trading days into the new year  the FT ran a headline “Worst start to market year in two decades”. Five days on it is “Doom mongers have their day in the sun”. The key arguments about the cause and what will happen next are:


While everyone accepts that the retail driven stock market in China is not a proxy for the economy, the weakening of the Renminbi is cited as evidence that the Chinese government is trying to stimulate trade growth. The counter argument from bullish investors and brokers is that this is more about the dollar strengthening (better economy, interest rate hike) than the RMB weakening and that the currency should be compared to a basket, not just the dollar.

Oil and Shipping

While the falling oil price acts like a tax break to net oil consuming countries (i.e. most of the West) the glass half-full argument is that it is weakening because of weakness in global trade. This can also be seen in the Baltic Dry index which just fell below 400 for the first time ever. Bulls would argue that cheap oil/freight can’t be a bad thing and surely it is more supply than demand driven, given OPECs decision to continue to produce even into growing North American and Iranian supply coming online, and to the surge dry bulk carrier production. That is already turning, with new orders down 59% in the first 11 months of 2015 according to the China Association of the National Shipbuilding Industry.

Credit collapse

Martin Wolf of the FT puts the chain reaction of credit collapses around the work as a reason for caution about medium term growth. Japan’s credit collapse was balanced by the credit boom in the West. The West’s collapse was balance by China’s boom. Now China is seeing its credit bubble bursting, who can take up the slack? If there is less lending, there is less investment and so less demand. RBS’s well publicised “sell everything” call (from their interest rate team) is partly based on this fear. The bulls response here is that the weak demand we are seeing is on the manufacturing side, services are humming along fine and this represents most of developed market economies.

There is of course more – the dire state of the Middle East, the US elections, Brexit and so forth. At times like this market sentiment and fund outflows can drive stock prices more than individual company fundamentals. We are here to help companies internally analyse their own businesses and business drivers, and to articulate this in a consistent manner to the outside world. Every investor we speak to tells us it is better to get bad news out as quickly, and as fully, as possible. If this is a situation you are facing we’d be happy to talk.

Related links:

Martin Wolf on credit bubbles (Woodford Investments)
Worst start to market year in two decades (FT)
Baltic Dry Index (Bloomberg)
Doom mongers have their day in the sun (FT)

Andrew Griffin spent almost two decades as a technology equity analyst before working in investor relations, corporate development and market intelligence for a UK listed software company. In 2015 he set up Oakhall to provide smart financial analysis and articulation for European public and private companies.