Serious Money: In the end, it turned out to be a bit of a damp squib. China's decision to allow its currency to float - in a very managed sort of way - was greeted by the markets with a bit of a yawn.
The most eagerly awaited event in currency - and other - markets in years took markets by surprise but didn't impress them very much. This, I think, was a mistaken reaction.
Formally, the Chinese have pegged the renmimbi to an unspecified basket of currencies, rather than a simple bilateral link to the dollar. A permissible small, daily fluctuation band belies the bigger picture, which almost certainly means a long-term appreciation of the Chinese currency. This is good news.
Serious Money has once or twice taken issue with those analysts who have taken an unrelentingly pessimistic perspective on what they see as the greatest threat facing global markets, namely the US balance of payments deficit. That deficit, which could approach 7 per cent of GDP this year, is, we all agree utterly unsustainable.
But how we get back to a more sustainable situation is where the debate starts. For super-bears, like Steve Roach of Morgan Stanley, the forecast has long been that adjustment will happen quickly and nastily. A collapsing dollar and sharply lower bond prices (higher interest rates) will trigger an economic slowdown - probably recession - that will cause equities to fall globally.
The first and obvious response to the pessimists is the observation that the imbalances have already persisted for a long time without triggering the market responses that they feared. "Not yet" has been the stock reply from the doom merchants, with the debate then settling down to a war of attrition.
Those of us willing to bet that the necessary adjustment will take time and be relatively benign have been comforted by the lack of problems so far but alarmed by the fact that the deficits have continued to grow. The gloom merchants take much comfort from the total absence of any signs of adjustment. Until now, that is.
There are several ways in which we could get back to a more comfortable situation. A severe US recession would curb imports and cut the deficit. More demand for US exports would help. Ultimately, the US does have to import less and export more. And two things have now happened that will lead precisely to that outcome.
First, US interest rates are going to rise, probably by quite a bit. This will dampen consumption and encourage saving - but gradually. This has been the unwavering message from the Federal Reserve for some time now. Second, the dollar will fall, thereby making the US more competitive. The US currency has already made much of the necessary adjustment against the euro and the next phase of currency changes has now started.
Many Asian currencies have begun a long climb against the dollar, thanks to the catalyst that is the Chinese revaluation.
Tighter US monetary policy and currency realignments are the stuff of textbook adjustment policies. Tighter fiscal policy would also help, but you can't have everything. It seems to me that the chances of a benign rebalancing of the world economy's biggest problem have risen significantly. And the reduction of risk is always positive for asset prices.
This is unambiguously good news for equities, although not without some regional nuances.
One stock market that probably doesn't do terribly well, at least in a relative sense, is the US.
Lower US growth - although still healthy - combined with higher interest rates and bond yields mean that foreign investors should look elsewhere for returns. Throw in a weaker dollar and you have a fairly compelling argument for avoiding US stocks.
European equities look much better. They are cheaper than their US counterparts and there are one or two signs that the European economy may be on the turn. Even structurally deficient economies can have cyclical upswings.
Corporate restructuring has already boosted profitability and an economic upswing - no matter how mild - could boost earnings by a surprising amount, particularly when we consider how operationally geared many EU businesses are.
Energy-related companies have led the way in the recent rally, telecoms are finally showing some signs of life and we may even see some deeply unfashionable consumer stocks come back into fashion. A better EU economy and favourable market climate should see financial stocks do well, particularly banks. Close to home, this looks to be an astonishingly favourable environment for industrial companies like CRH as well as the Irish banks. Indeed, European banks as a sector should do well.
Asian equities also look to be a good bet, not least from a currency perspective. The Chinese revaluation should also drag up many other Asian currencies against both the dollar and the euro. And the Chinese/Indian growth story is not going to go away and will continue to have positive ripple effects throughout much of Asia. As ever, the best way to play China is not to buy stocks directly in that market, but to go through places such as Hong Kong.
It is, as always, important to recognise the risks. Nevertheless, it is important to note that a significant risk factor facing global markets looks likely to dissipate, thanks to developments in China.
Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.
