It probably hasn’t escaped your attention that global stock markets have been on the slide recently. The FTSE 100 ended at 7,686 on 29/7/19. Yesterday it closed at 7,198 a fall of 6.35% in little over a week. In the US the S&P 500 fell from a historic high of 3,026 on 26/7/19 to 2,884 yesterday i.e. down 4.7%. The principal causes of the losses were the old chestnut of US/China trade wars, a fall in the value of the Chinese renminbi from official currency manipulation and a drop in US interest rates, the first for more than a decade. Investors have interpreted this as a sign the US economy is slowing and may be heading for recession. In other circumstances monetary easing is positive for stocks – interest rates will be lower for longer whilst bond yields fall, thereby making equities relatively more attractive. This was what QE achieved but this time markets have drawn the opposite interpretation – it’s bad. In contrast gold, a traditional safe haven asset in contrast has rallied.
For UK investors we could throw into the mix the ongoing saga that is Brexit. Markets hate uncertainty. However it is important to remember the effect of Brexit on the UK economy and investments is complex and nuanced. Take the issue of a falling pound. On Monday 29th July the threat of a no deal Brexit caused the FTSE 100 index to soar by just under 2% in a day. The FTSE 100 index rose because around 70% of constituent company earnings are from overseas, generated for example in Dollars, Yen and Euros. When converted back to pounds weak Sterling gives a boost to these earnings. However this largely went unreported; a falling pound is only viewed as a bad thing in many quarters. The reality is there are pros and cons for an economy when a currency falls. The UK market’s fall of more than 6% since the end of July was primarily due to global events.
Whether these events signal a wider sell-off is difficult to say. I am not superstitious but September and October are often bad months for stock markets and a number of commentators have expressed fears of further falls. Undoubtedly the global economy has slowed and geo-economic and geo-political events are a risk to investments. How they are handled by those in charge will be crucial for good outcomes. For the rest of us we have to concentrate on what we can control and not be too worried about what we cannot. Investment reviews may be in order with profit-taking and risk reduction to protect capital. In any event a long term perspective is required to ride the volatility.
The content of this blog is based on my own understanding of the global economy and is intended as general investment information only. Nothing in this article should be construed as personal investment advice. You should seek individual advice based on your own financial circumstances before making investment decisions.