Financial Markets Update

Given the current theme of global stock market volatility caused largely by the issues that exist in the Far East, we are providing a brief update addressing the current market volatility and the likely effect on your investments.

Current Market Volatility

• There are concerns over market volatility in recent weeks, with the lack of a single clear trigger making it harder to assess the potential for this volatility to be sustained.
• The fluctuations we have seen in the past couple of weeks are a concern in the shorter term, but the overall outlook for equities remains positive. For tactical investors, there could be some opportunities to buy equities in the coming days, but this is risky business and most savers should remember that diversification remains key for riding the bumps of stock markets over the long term

What’s causing volatility in equity markets?

There are a number of forces driving these fluctuations:

• The devaluation of the renminbi, (Chinese currency) triggered a sell off of emerging markets (EM) assets. This negative sentiment has also affected the developed markets.
• Broader fears over China have certainly impacted emerging markets, which also face pressure from US dollar strength and the prospect of the Federal Reserve rate rises – as well as the recent slump in commodity prices.
• Also, thinner markets during the summer holiday period mean that movements can be amplified by low liquidity, and there’s likely an element of this here.

The outlook for global equities remains positive

• Despite the panic of recent weeks, the outlook for the world economy has not significantly changed. From a fundamental perspective, the low growth/low inflation situation remains and is broadly supportive of equities.
• Loose central bank policy supports this picture, particularly in Europe and Japan, and, while we are all waiting for the ‘Fed’ to increase interest rates this may not happen until the end of the year.
• However, risk remains. The pace of China’s slowdown has brought some surprises, and continues to impact commodity prices overall. However, the transition to a more sustainable, consumption-driven model of growth has been happening for some time.
• While China’s export and manufacturing sectors are struggling, its service sector continues to expand and become more important. None of this structural transition was ever going to be a smooth ride, and its impact on both developed and emerging markets will continue to be felt.
• On top of this, ongoing concerns around the ‘Fed’ and the prospect of higher interest rate rises are likely to sustain pressure on Emerging Market assets. This could affect the vulnerable countries such as Brazil, Russia and South Africa more.

As Volatility continues, active management is important

• In recent weeks, many ‘active equity managers’ have begun to add to risk assets. Indicators traditionally suggest that now is a good time to increase equity exposure, given the mood in markets, more attractive valuations and unchanged fundamentals.
• However, investors must proceed with caution. Jumping into equity markets can backfire, and indeed equities aren’t the only asset to consider. Investors can help mitigate volatility in their portfolios over the longer term by diversifying their investments across a broad range of asset classes that include equities, commercial property, fixed interest securities (bonds) and cash to spread risk even further.
• While we have seen equity markets fall in recent weeks, bonds have performed relatively well, and the traditionally negative correlation between these asset classes can help protect a portfolio from volatility.
• We at Loughtons will continue to ensure that client’s portfolios are well diversified in accordance with the agreed tolerance for risk and the timeframe for investment.

As you see the current situation cannot be ignored or overlooked, but we believe it is a ‘correction’ in the markets and indeed the medium to longer term view is still very positive.

If you would like to know more about how we add value when advising you based on your own circumstances, please contact us on 01626 833225.

Please note that the above article does not constitute financial advice.