Fraser Heath Market Update
Our investment meeting ordinarily is a review of the previous month, however given the volatility in world equity markets over the last couple of weeks, this month we focused on the extraordinary market conditions. We have therefore replaced our usual minutes with our thoughts on what has happened in world markets and what the immediate future may hold.
WHAT HAS CAUSED THE SELL OFF?
Market weakness had mainly impacted emerging markets and commodities. Signs of a slowing down in the Chinese economy have weighed heavily on the Chinese stock market. While in the developed markets shares are typically owned 80% by institutions and 20% by private individuals, this position is reversed in China. Inexperienced investors have been hit hard.
More significantly for western economies is that the actions that the Chinese government are taking to halt the slide and allay fears of a slowdown in the economy have not allayed fears. If the Chinese economy buckles this will have a significant impact around the world and it is this fear that has now spread to developed markets.
Signs of the Chinese economy slowing prompted the Chinese Central Bank to take action to correct this, but this did not initially convince investors and prompted a large correction in prices.
The Vix Index (otherwise known as the Fear Index) has more than doubled amid signs of panic selling. The selling has, in many cases, been indiscriminative, with all markets and sectors being sold off, rather than those that are directly affected by the slow-down in China
In addition a lot of selling has been caused by “programme selling” where institutions are forced sellers, due to their systems automatically placing sales when an investment falls below a certain price.
August is typically a month of holidays and the low volume of trades means that the liquidity of stocks is affected. With fewer buyers in the markets stock prices fall more sharply until they can find a buyer. There is an old (and unreliable) adage of “sell in May and go away” which reflects the frequency with which summers and their trading volumes can often result in turbulence for those investors who like to actively trade.
WHAT DOES THE IMMEDIATE FUTURE HOLD?
Nobody can be sure but it is important to remember that we are long term investors.
Please also bear in mind that unless you are a higher risk investor, your portfolio will contain other investments to equities which in times like these help to reduce volatility
Fund managers are drawing their conclusions but the consensus is that we can expect more volatility and there may be further market falls.
There has been a lot of speculation about a hike in interest rates in the last few months, but an increase is less likely in the short term as a result of these market movements.
WHAT DO WE THINK?
We are of the opinion that this volatility can be seen as a healthy market correction in a “bull” run rather than the start of a protracted downturn.
While for now markets do not feel good and could well head lower, the magnitude of the moves, particularly in many developed market shares with little or no direct exposure to China, do not seem justified by fundamentals.
Our main message is to be patient, hold your nerve and keep calm. Several fund managers have quoted from Kipling – “if you can keep your head when all about you is losing theirs”. This feels particularly appropriate for current market conditions.
Date of next meeting 23rd September 2015
The UK equity market retreated in November, only the second month in 2017 where we saw a meaningful fall in the key FTSE 100 Index. Comments made by Mark Carney, following the November Base rate rise, highlighted the Bank’s view that inflation will be a problem for some time to come and how business and consumers react to this will determine the path for the UK economy over the coming months. The Bank said in a statement: “The decision to leave the European Union is having a noticeable impact on the economic outlook.
The Bank of England’s decision at the start of November to raise interest rates for the first time in 10 years was widely expected and caused little initial stir in the markets. Since then the FTSE 100 has fallen a couple of percentage points at the time of writing. Perhaps the combination of negative talk around Brexit combined with the prospect of rising interest rates are starting to bring back a little fear to the market which has, for some time, felt like it has been in a state of complacency.
Most commentators expect interest rates in the UK will rise for the first time since July 2007 when the Monetary Policy Committee (MPC) of the Bank of England next gets together for its monthly meeting on 2nd November 2017. Indeed, Mark Carney said on the BBC Today programme, shortly after the minutes of last month’s meeting were released, “What we have said is that if the economy continues on the track that it has been on - and all the indications are that it is - in the relatively near term you can expect that interest rates will rise”. He went on to say, “We are talking about just easing a bit off the accelerator to keep with the speed limit of the economy”, which has been widely predicted to mean that rate rises will be gradual and measured.
Our reason for showing these graphs is to highlight that the VIX index is trading back at 2007 levels of low volatility while stock markets are at all-time highs. We can no more see the future than anyone else but we do know that when it comes to investing, the most money is often made when every sinew in your body is screaming that it is madness to invest, and that sometimes the opposite is true.
It has been a strong start to the year for investment portfolios, mostly driven by signs of continued strength in the US Economy and the promise of more to come under the Trump presidency. Markets always move ahead of the economy so to make money, investors will position portfolios to benefit from what they think is around the corner. But what if the promise does not materialise? One fund manager described this recent wave of enthusiasm as the “Trump Bump” and that this may well be followed by the “Trump Dump” if the new President is unable to deliver on his campaign promises due to lack of support from political colleagues. In this respect, it seems that the failed repeal of Obamacare has given investors pause for thought over the last week or so.
While some asset classes are looking expensive, on an individual basis, there remains optimism amongst fund managers. Those who particularly seek to invest in undervalued, unloved but robust companies can see plenty of scope for increased valuations in their investment pool.
Eight years have now passed since the FTSE 100 hit its Credit Crunch low point. In investor memory, particularly among younger investors, we are getting to the point when the slide that started in summer 2007 down to its nadir risks being forgotten. We don’t know what the future holds but the past tells us that investing needs time on your hands to ride out the tough times. We’re confident that investing remains the best long term strategy for your money but make sure that you understand the strategy you are taking and that your portfolio is right for your attitude to investment risk and your time frame.