Market Falls – Will the Bear Bite You?

man drawing on glass a bear and a bull to explain market falls

News & Insights

Gareth Trainor

11th February 2016 at 11:15am

Market falls and the news headlines that accompany them can be worrying.

They can make you feel like you should ‘do something’ instead of sitting back and watching the panic.

But it’s times like these when it’s crucial to keep calm and remember two of the most important rules of investing: take a long-term view and diversify.

What’s been happening?

The turbulent start to the year shows no sign of abating, with global markets continuing to experience falls. The MSCI world equity index is down 11.25% so far this year (as at 9 February 2016), meaning world stocks are now at their lowest levels since 2013.

But in the UK it’s been the FTSE 100 grabbing most of the headlines over the past few weeks. On 20 January it dropped 3.5% in one day, taking it into some people’s measure of bear market territory – when a market declines over time by more than 20% from its peak. And then on 9 February it hit a three-year low of 5632, 9.8% down from its year end level of 6249.

So what’s caused this?

Markets have entered 2016 making a lot of noise – you can read about how events in China have impacted markets already this year here. But more recent events come after specific warnings about the oversupply of oil and concerns about global growth.

  1. Falling oil prices caused by oversupply

There are concerns that global markets have been flooded with an oversupply of oil and ongoing events which continue to push prices down:

  • Growth in China is slowing, raising concerns about the country’s future demand for oil.
  • Brent crude is trading around $30 a barrel, compared to over $100 two years ago.
  • There’s likely to be a wave of oil coming to the market from Iran now that sanctions have been lifted there.
  • The US has been using shale oil as an alternative fuel, further driving down the price of crude oil.

The culmination of some of these factors led the International Energy Agency to comment that the market could ‘drown in oversupply’.

The FTSE® 100 index is heavily biased to energy, particularly oil, companies – so the news hit hard. Oil and gas stocks make up 12.8% of the index, while basic resource stocks make up another 3.9% (source: FTSE, as at 29 January 2016).

  1. Concerns about global growth

Investors are concerned about the impact of falling oil prices on global growth – particularly after the International Monetary Fund downgraded its global growth forecast and issued a warning about the outlook.

Slowing global growth in China and the US beginning to increase interest rates were already troubling investors so these warnings have further fuelled anxiety.

Reflecting on this anxiety, Andrew Milligan, Head of Global Strategy at Standard Life Investments, comments: “There are a series of worries for global investors, relating to China, geopolitics, or the cost of oil.

“We still see the major economies experiencing slow growth in 2016 rather than a recession, and therefore there are some areas of value appearing – as long as policymakers remain supportive and financial market stress does not affect business and consumer sentiment.”

Remember: take a long-term view and make sure you’re diversified enough

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.

You’re unlikely to be invested purely in the FTSE® 100 index or energy stocks. Most of us are invested in a mix of assets and 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.

At times like these, it’s a good idea to ask yourself why you invested in the first place? Has your rationale actually changed? Try to take a step back from the short-term noise and remember the importance of taking a long-term view.

If you get someone else to make your investment decisions

What you need to do 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 select your own funds or investments

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 this against the outlooks of fund managers who look after more diversified, multi-asset funds.

If you do decide to change your investments, make sure you’re doing this for the right reasons over the long term. Perhaps it’s a good time to review whether you feel comfortable making your own investment choices or whether you prefer to delegate the decision making to others – find out more in DIY or Delegation? The 5 Investment Cs

If you have any questions or concerns, do 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 at February 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.

 

Source for index figures: Morningstar, as at 10 February 2016.

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.