11th January 2016 at 6:00pm
Only a month left for the Chinese year of the sheep (or goat) and China’s stock market dip has sent global markets and the FTSE spinning once more. But what’s really been going on and what’s the impact for your investments?
Should you be worried?
Despite a turbulent beginning to 2016, our experts think it’s unlikely that the events in China will lead to any major deterioration of global growth over the rest of the year. I’d always caution against making any rash decisions – as we’ve seen in the past, it’s not always wise to knee-jerk into selling after a market fall.
If you have a well-balanced portfolio, with investments across lots of different types of assets and geographies, then things should be OK over the longer term.
Here’s what’s been happening in China
Following last year’s substantial stock market falls, China implemented a ‘circuit breaker’ so that trading would be suspended if the market fell by a substantial amount.
Last week, trading on the Chinese stock market was suspended twice after sharp falls. These came on the back of the biggest falls to the Chinese currency (the renminbi) versus the US dollar since August last year. By the end of the week, China had scrapped the circuit breaker and introduced new rules intended to smooth selling in the market. This brought some calm, although over the week as a whole Chinese share prices were down about 10%.
(Source: Financial Express data from 31 December 2015 to 8 January 2016 as at 11 January 2016. China Shanghai Composite price return in local currency.)
What’s been the impact elsewhere?
China only makes up 2.27% of MSCI’s All Country World Equity Market Index. So, for those invested in a typical diversified fund – with other assets than just equities – the direct impact should be muted. (Source: agf.com)
Naturally, when an economic force as big as China shows signs of volatility, there are likely to be global implications. The indirect impact has been felt through stock markets around the world as they recorded losses on the back of the news from China.
In the USA, the Dow Jones and the S&P 500 followed falls in Asian and European markets, shedding around 6% each. Closer to home the FTSE® All Share fell by a similar amount.
(Source: Financial Express, data from 31 December to 8 January 2016 in local currencies, as at 11 January 2016.)
Oil and metal prices also dropped on the back of the Chinese woes. Investors rushed to invest in perceived safe havens such as gold and government bonds. And there were notable movements in currencies, including the euro and the Japanese yen gaining against the US dollar.
The view from Standard Life Investments is that China is facing a number of challenges and that policies are being poorly planned and communicated. Andrew Milligan, Head of Global Strategy at Standard Life Investments, states: “As Chinese authorities deal with a very complicated economic environment, mistakes will continue and poor communication of intentions will further add to market volatility.
He continues: “But we do not currently expect the volatility in Chinese and global risk assets to lead to a meaningful deterioration in global growth in 2016, as activity in the US and Europe remains well supported and modestly above trend.”
Standard Life Investments still believes that the US Fed will continue to make careful and gradual reforms to interest rates, as it did in December (you can read more about this in our blog). Other major central banks will make sure their policies are aligned to helping the global economy and lifting underlying inflation.
What does all of this mean for you?
Market falls can be disturbing and make you feel as though you may need to change your investments. But most of us are investing over the long term and market falls happen periodically.
When markets fall by a reasonable margin and you are panicked into selling this just locks in a loss. Remember why you’re invested in the first place and make sure that your rationale hasn’t changed.
What you need to do also depends on how you’re invested. If you’re in a ‘hands-off’ type of investment where someone is making the decisions for you, you should be fine. Just make sure they can invest in lots of different types of investments across different countries and you should be well diversified.
If you’ve selected your own funds or investments, you’ll probably want to make sure your choices still meet your needs.
Again, revisit your original investment rationale.
Why did you pick the various asset classes or countries in the first place? Is your portfolio diversified, or did you deliberately take a riskier single asset class or geographical approach?
You might want to look at what fund managers who are specialists in the markets you invest in are saying, and balance these against the outlooks of fund managers who look after more diversified, multi-asset funds.
It’s been said that investing is the only industry where everyone runs for cover when there’s a sale on. When prices fall you can stick, buy or sell. If you’re invested for the long term then sticking isn’t a problem but for every person who sells after a fall, someone else buys in the hope they have picked up a bargain.
If you do decide to change your investments, make sure you’re doing this for the right reasons. And, if possible, take a long-term view – you can read more here.
If you have any questions or concerns, post your comments below. We’ll continue to keep an eye on what’s happening in the markets, and update you if anything changes.
The information in this blog or any response to comments should not be regarded as financial advice. Information correct as of January 2016. Past performance is not a guarantee of future return. Please remember that the value of your investment can go up or down, and may be worth less than you paid in.
Where we mention FTSE, we are referring to FTSE®.
*”FTSE” is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited (“FTSE”) under licence. Standard Life is licensed by FTSE to redistribute the FTSE All Share and FTSE 100. All rights in and to the FTSE All Share and FTSE 100 vest in FTSE and/or its licensors. All information is provided for reference only. Neither FTSE nor its licensors shall be responsible for any error or omission in the FTSE All Share and FTSE 100.