EquitiesMay 4 2016

Volatility knocks

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      Volatility knocks

      The macroeconomic outlook is uncertain for 2016 and beyond.

      There are numerous factors that can be attributed to this, including the slowdown and rebalancing of the Chinese economy, lower commodity prices and strains in some larger emerging market economies which may weigh on growth prospects worldwide.

      Sell-offs in January in the Chinese stock market appear to have been triggered by results from a purchasing manager’s index, which showed that business had slowed for the tenth consecutive month for the country’s shipbuilders, steelworkers and other industries.

      China’s growth in 2015 was at its lowest level for 25 years, although this was still better than most other developed economies.

      The Chinese currency has seen severe volatility, and hit a five-year low earlier this year. The expectation is that the yuan will weaken further, and this may lead to the Chinese sending cash overseas, which will exacerbate the currency weakness.

      The Chinese government attempts to regulate the market by intervening when markets become too volatile. Larger shareholders were banned from selling stocks for six months in August 2015, and it is likely if markets continue to fall this ban may be extended.

      Many saw their pension funds or other investments rise significantly, and now feel the drops more, emotionally

      China’s volatility came to a head in Q1 2016, when it caused a rout in global stocks. However, a comparison of the first four months of 2016 with the whole of 2015 shows that, despite widespread concern, volatility has actually reduced somewhat this year compared to last year.

      Over the first four months of 2016 the FTSE 100 Index in the UK saw an intraday high of 6373.93 and an intraday low of 5499.51. The biggest drop was -3.46 per cent on January 20 2016. The biggest rise was 3.08 per cent on February 12 2016.

      Meanwhile, over the whole of 2015, the FTSE 100 saw an intraday high of 7122.74 and an intraday low of 5768.22. The biggest drop was -4.67 per cent on August 24 2015. The biggest rise was 3.09 per cent on 25 August 2015.

      However, as 2015 was the year the FTSE 100 reached its historic peak of 7122.74, investors are now much more sensitive to subsequent volatility. Many saw their pension funds or other investments rise significantly, and now feel the drops more, emotionally, suffering seller regret because they did not adjust their portfolios at their peak.

      The above timescales are relatively short from an investment point of view. Therefore, when examining volatility one should compare longer periods of time also. Over the period 1 January 2011 to 16 April 2016, the FTSE 100 saw an intraday high of 7122.74 and an intraday low of 4788.30.

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