Events surrounding global markets have been making headlines for the last few days now, and these headlines have only been intensifying in the last 24 hours as stock markets across the US and Europe have fallen sharply amid fears of a Chinese economic slowdown.
There is also another reason causing uncertainty linked to the American Central Bank – The Federal Reserve. They have signalled their intentions to increase interest rates from next month, and this has further unsettled investors, particularly in the Emerging Markets sector triggering more capital outflow (sell offs).
China is the worlds second largest economy, and after its central bank devalued the countrys currency, the yuan, two weeks ago, this raised fresh concerns that a slowdown in the countrys economy was worse than originally feared. Everyone wants to know what the Chinese government is going to do next to shore up shares and confidence in the economy. The smart money is on the central bank reducing interest rates and injecting a semblance of consumer confidence into the markets. That is what many had hoped would happen over the weekend, but at each point, the Chinese government has so far seemed slow to react.
It will also be interesting to see how the Federal Reserve reacts, and whether it re-evaluates its decision to increase the base interest rate from next month as seemed was their plan, or whether they will now delay this decision.
How has the uncertainly in the last 24 hours affected global markets:
- The Shanghai Composite, Chinas main stock exchange, at its worst point was down 8.5% but has since recovered slightly and was down 4.3% by the end of Tuesday mornings trading session.
- Tokyos Nikkei index had a volatile day, closing 4% lower.
- Wall Streets Dow Jones fell 6%, then almost recovered its losses before closing 3.6% lower.
- Londons FTSE 100 index closed down 4.6%.
- Major markets in France and Germany down by 5.5% and 4.96% respectively.
Despite worries about the slowdown in the Chinese economy, many market watchers and analysts feel that the markets are well enough equipped to handle some short term volatility. Most markets are only down slightly on where they were 12 months ago and this is seen very much as a market correction rather than the start of a long term bear market.
As markets across Europe start to open for trading today (25.08.2015) they are already on average up 2% on yesterdays closing prices. The UKs FTSE 100 is currently up 3.05% in todays trading at the time of writing this piece. This has been followed across other major European markets with the Dax in Germany up by 4.4% and in Paris, the Cac, was ahead by 4.6%. Other European markets, Lisbon, Madrid, Moscow and Milan were all also sharply higher.
These gains have been seen ahead of the Chinese Central Bank cutting its base interest rate down further in an announcement made this morning by a further 0.25% along with the Central Banks reserve ratio requirement; a move which is expected to see gains enhanced across the European and US stock markets. The Hang Seng futures had risen more than 2% after the Honk Kong market closed, also ahead of the rate cut announcement, and is expected to re-open with extended gains of around 3.3%.
We are very much in the middle of a traditional market cycle, whilst in the short term there will no doubt continue to be uncertainty and volatility, we expect the typical stages of a generalised sell off to exhaust itself once prices come down sufficiently to create compelling bargains for investable funds.
One important message for nervous investors to take note of; many investment managers see this correction as a potential investment opportunity.
Our relationship with various Discretionary Fund Managers for our clients portfolios has proven beneficial in this situation, with both their in-house analyst experts and the fund managers taking a proactive approach, constantly monitoring market movements and wider economic activities across all geographical locations. We have seen higher than average cash holdings within portfolios as fund managers react to near term caution and concerns about a number of factors including the slowing of the Chinese economy, volatility of Chinese stocks and the possibility of an imminent interest rate rise from the Federal Reserve. Having widely diversified portfolios will have provided a degree of insulation against the wider falls in equity values that we have recently seen.
Please see some comments below from some investment managers that we work closely with;
Brooks Macdonald Asset Management;
Global stock markets have had a tough few weeks, with most markets having fallen by more than 10% from their peaks, indicating that an “official” correction is underway. Whilst the current volatility and increase in risk aversion may continue for a while longer, we believe that the global economic backdrop remains very supportive for equities and bonds beyond the next few months. In our view, the Chinese authorities have sufficient monetary and fiscal tools available to avoid a hard landing, and their long-term plans to open-up the financial markets to international investors is very bullish for global growth and equities.
However, our expectation is that markets will soon stabilise and we are naturally keen to make the most of opportunities that present themselves, either to add value from a relative perspective or to benefit from the major trends and themes that will drive future returns.
There is likely to be continued volatility this week with key economic data announcements in the USA and Brazil, the US Feds annual Jackson Hole meeting and the potential for fresh elections in Greece. However over the longer term the economic recovery, particularly in the US and UK, means we remain positive on equities over the longer term. This economic recovery has further strengthened with the Confederation of British Industry (CBI) announcing further upgrades to its predictions for UK growth. Therefore currently we see this as a market correction, as opposed to the start of a long term bear market, and a potential investment opportunity, although we continue to monitor the situation very closely.
Investec Wealth & Investment Limited;
Clearly the ongoing falls in financial markets, driven in a large part by China concerns, are unsettling. It is impossible to say at what level markets will stabilise, but standing back from it all, the underlying global economic picture remains reasonable. The US economy is performing well, Europe is in the early stages of recovery and whilst China is slowing, their growth remains at relatively high levels. Lower oil and commodity prices are on the whole a positive for the global economy and we suspect market movements may cause the US to delay again when they start raising interest rates.
All eyes will remain on China and what further levers they pull to stimulate and rebalance their economy; their financial strength gives them further options.
Markets may fall further but we would encourage clients not to make panicked decisions having already been a correction in excess of 10%.
Cazenove Capital Management;
Market corrections of the nature we are currently experiencing always prompt the question Is there something we are not seeing?
We are used to volatility in financial asset prices, but it is the suddenness of setbacks, such as that seen over the past couple of weeks, that is so uncomfortable. Albeit, this is against the backdrop of seasonally low volumes, there is clearly something that is causing anxiety. The two main causes of concern would seem to be the developments in China and the likelihood of a tightening in US monetary policy before the end of the year.
It may be considered ironic that while markets are becoming more anxious about declining growth in countries such as China, they seem to be equally stressed by the implications of gradually improving growth prospects in the West. Central banks have held back so far, from responding to improving conditions; most obviously in the US and the UK. However, with labour markets tightening and with rising employment costs suggesting that domestically generated inflation is likely to start rising, the debate has changed to whether the US Fed will start raising interest rates from the crisis levels, and when the Bank of England will follow. Our view is that modest rate increases in the US and UK will not have a major impact on growth.
Its not unusual for financial markets to display flashes of extreme anxiety. In doing so, they act as shock-absorbers within the global economy. Indeed, the moves we have seen in markets over the last few weeks are completely within the bounds of expectations, and historical context, with rational differentiation across markets. Sometimes, fears are in line with economic reality; more often than not, fears are exaggerated and/or unwarranted. If this is the case, then the resulting movements in asset prices, and more reasonable valuations, provide investors with opportunities, and we believe that to be the case currently.
Neither the volatility nor its causes should come as a major surprise: these two themes have long been on our shortlist of likely market concerns this summer. The volatility feels dramatic partly because markets have been remarkably stable in recent months.
The big surprise with Chinas A-share (onshore) market was the initial surge, not the subsequent decline: Chinas stock markets are still expensive (and after falling by roughly two-fifths from the June peak are still up by roughly the same amount on a year ago). The A-share market does not usually correlate with the wider world, not least because it is still not easily tradeable.
We believe the US and EU economies have enough momentum to allow earnings expectations to stabilise, though it is unlikely this will become evident soon. Meanwhile, the holiday season and historical calendar effects dont help (September/October are often difficult months for markets). The volatility will unearth long-term opportunities, but the best advice today is to sit tight and see how sentiment evolves.
Robertson Baxter is a full service whole of market Independent Financial Advice firm. We offer a Family Office approach to clients of high and ultra high net worth together with Trustees and Charities. Our holistic advice covers all areas of Pension, Investment, Protection and Estate Planning, serving clients across Yorkshire.