The PBOC's announcement of August 11, 2015 to allow the Yuan to move more freely was the catalyst that precipitated the breakdown in developed equity markets. It should have been clear for some time that the authentic threat to global equity assets is the deflation in global product markets, whose epicenter is China. The sell-off in developed equity was preceded by signals of crisis from commodities and emerging markets. Crude oil and major commodity indices have registered new lows for this investment cycle. The emerging market equity benchmark has fallen below the range of fluctuation established since 2011.

The new element in the long story of the deflationary return-to-mean of the developing commodity space is that currency weakness in the emerging world has become chronic, encouraging capital flight. The idea that used to be fashionable in the investment community, that Chinese style management of capitalism is superior, has been extinguished this year. The initiative has been destabilising, encouraging expectations of future weakness. The investment world has concluded that China has signaled that the decade-long rise in the real external exchange rate of the Yuan has climaxed, due to the pressure upon its producer assets. The dislocation within the global US$ bloc –the conflict between America's domestic economic agenda and the stress in the commodity emerging space – constitutes a far more substantial problem than the difficulties of the euro currency zone.

The performance of the Austrian equity market was mediocre in the last twelve months. Especially in recent months the market was under selling pressure. Particularly export oriented and industrial companies were sold off in light of the emerging markets and commodity weakness.

In light of the currently reasonable, especially compared to bonds relatively attractive valuation of stocks on the one hand and the high degree of uncertainty (potential monetary tightening in the USA, emerging markets and commodities weakness) on the other hand, we recommend a defensive strategy for portfolios. We have a preference for companies with non-cyclical business models, solid balance sheets and high, sustainable dividend yields.

Thomas Neuhold
Head of Austrian Equity Research
Kepler Cheuvreux
28 August 2015


Wiener Börse AG would explicitly like to point out that the data and calculations given in this report are historic values, which do not permit any conclusions as regards future developments or value stability. Price fluctuations and loss of capital are possible in securities trading. The contribution is the personal opinion of the analyst and does not constitute a financial analysis or a recommendation for investment by the exchange operating company, Wiener Börse AG.