Monday’s sell off gave rise to some of the steepest falls in the global equity market since the 2008 financial crisis.
The downturn started with an 8.5 per cent plunge in the Shanghai Composite, raising concerns that the Chinese authorities, after earlier commitments to support equities, may not be able to contain losses.
Mounting fears of an abrupt slowdown in China rippled through the markets and spread far and wide.
The People’s Bank of China’s (PBoC) decision to lower interest rates appears to have stemmed the tide but questions still remain as to what investors should do now and whether there are still opportunities available in this fractious market.
The global sell off was a response to weak manufacturing data coming out of China coupled with the sense that the People’s Bank of China would no longer act aggressively to resolve issues in the equity markets.
Alan Miller, chief investment officer at SCM Group, puts the issue down to a belief that the Chinese authorities would prop up the market and when no action was forthcoming the global sell off began.
On Monday (24 August) the FTSE 100 suffered from a 15 per cent fall on its all time high of 7103.98 on 27 April 2015. Losses continued on Wednesday (26 August) as the FTSE ended down by 1.7 per cent at 5979.20.
Adrian Lowcock, head of investing at Axa Wealth, attributes the losses to uncertainty concerning China, which gave rise to the perception that they were no longer in control of the situation.
He said: “On 21 August, weak manufacturing data came out of China raising concerns of a Chinese slowdown. Over the weekend Beijing relaxed rules to allow state pensions to buy shares. The action from China was seen as not strong enough and concerns rose that they were no longer in control.”
There is some debate as to whether Monday’s sell off amounts to a market correction or the beginning of a global crash.
Although, this argument has dissipated since the PBoC took the decision to cut interest rates on Tuesday (25 August).
Anthony Willis, investment manager in F&C’s multi-manager team, said: “In many cases, sentiment does appear to be ahead of fundamentals. Any concern over a slump in global growth is not justified by the economic data for now. China has slowed, but it is a long way from an economic disaster.”
However Jon Gumpel, investment director at Brooks Macdonald Asset Management, sees China’s position as far more precarious and believes the sell off has the ability to drastically affect the global economy.
He said: “It’s a Sophie’s choice moment for China’s government as they have to choose whether to devalue or not, which in turn impacts on their local or international reputation. Saving locally would affect their longer term aims and international reputation especially if they trigger a global recession when central banks have already spent their powder.”
Mr Willis stated that depending on investors’ appetite for risk there could still be opportunities for investment.
He pointed to areas which are less exposed to China such as European autos or even emerging markets in Asia as areas to consider. However, he also stressed that now may not be a bad time to allow the markets to settle before investing.
Many investors responded to Monday’s equity sell off by moving to cash or investing in ‘safe haven’ commodities such as gold. SCM Group’s Mr Miller advises against both practices.
He said: “Generally so called ‘safe’ assets like gold or short term bonds receive large cash inflows following market corrections, which means their prices tend to be inflated at exactly the same time they are being bought.
“Private and institutional investors are often driven by emotion that encourages them to sell after recent falls and buy after recent rises.”
Despite the uncertainty in the global market, investors should still be concentrating on long term goals and remain well diversified in their portfolio in order to avoid the biggest impact of the sell off.
Axa Wealth’s Mr Lowcock agrees that now is not the time to make rash or emotionally led decisions.
He said: “It is often too little, too late for investors looking to go defensive once the market has fallen 5 per cent in one day. Gold should always form part of a portfolio to provide that protection so if you don’t have any then consider buying some soon.”
However investors can afford to look to the medium and long term, according to Danae Kyriakopoulou, senior economist at the Centre for Economics and Business Research.
She argues that China’s position isn’t perilous and due to the structure of their economy its impact on the global markets would be limited.
She explains: “Those looking out for China to crash any minute now are overestimating the importance of the stock market in China’s real economy and underestimating the wide range of options its policy makers still hold in their economic toolkit.
“These include further room for devaluation, further interest rate cuts and $3.7 trillion in currency reserves.”
While China’s position isn’t of immediate concern investors should make sure they are looking at long term investments and have a diverse portfolio to avoid becoming victims of global shifts in the market, experts FTAdviser spoke to agreed.
There are opportunities to be had for investors who are risk inclined, they noted.
Axa Wealth’s Mr Lowcock said: “Some sectors will be hit more than others. For those looking to invest, I think corrections provide some of the best buying opportunities but it is important to drip feed money in and be prepared for further falls in the short term.”
