Markets in a Tailspin

You are no doubt aware that global stockmarkets have sold off sharply this week. Some markets and stocks are in “correction territory,” defined as being down 10% or more off their peaks, for example the FTSE 100 index whilst others are in a “bear market,” down more than 20%, for example the Shanghai Composite Index and interestingly the US tech giant Apple.

The principal cause of the rout has been a slowdown in the Chinese economy and devaluation of the Yuan. In many senses there is nothing fundamentally new here. The rate of expansion of China’s economy has been declining for several years and it is well-known that the government is seeking to shift the economy from export and infrastructure led to one of domestic consumption. The goal is to create a mature economy, one that is more prevalent in the US and the UK. This is invariably a difficult and long-term task. Even so governments and central banks around the world would bite your hands off for Chinese GDP growth even if this falls to 4-5% in 2015. That said there is a suggestion it could be as low as 2%. Unfortunately official Chinese statistics are somewhat inflated and unreliable.

Given that the fundamentals of the global economy were known before the crash, they do not suddenly change overnight, I am always left wondering if a sell-off like this is principally driven by sentiment. A piece of bad economic data comes out and investors get into a lemming like tizz and head for the exit. It then becomes a self-feeding vicious circle.

My take is the global economy is recovering slowly from the recent financial crisis but the overall trend is positive if patchy. In this context my general advice would be to hold equity investments for the long term. Park them for at least three to five years you’ll ride some storms but returns should good in the medium to long term.

Is there anything else I would advise? Before the Greek debt crisis when markets peaked in April and May, in client reviews I advised and arranged selected profit-taking to cash or assets and markets with more attractive valuations. I am pleased it worked well. However I will generally put further profit-taking on hold as there is no point in crystallising losses or small profit figures. For the contrarian investor I am reminded of Warren Buffet’s mantra of being “greedy when others are fearful.” I prefer the word “bold” to “greedy.” Now may be time to invest cash earning diddly squat to buy equities at more attractive prices. Of course markets could tumble further. Unfortunately there is no risk free investment. Finally I return like a stuck record to my well-worn gripe, investors should consider making regular savings to equity investments for risk reduction and the potential gains from volatility and periods of depressed prices.

This blog is intended as general commentary on global stockmarkets and reflects my own views. It is not an invitation to invest in equities or undertake regular investment as these may not be suitable for your financial circumstances or your risk profile. You should seek individual advice before making investment decisions.