Stock markets across the globe have taken a tumble – equity prices in London, New York, Hong Kong, Shanghai, Frankfurt and Paris are all down, the knock on effect of China devaluing its currency in recent weeks.
Any investors doubting the influence of China on global stock markets have had their reservations blown out of the water over the last week. On top of China devaluing its currency, and the resulting fall in Chinese A and B shares listed in Shanghai and Hong Kong, Greece called a shock election last week. Markets do not like uncertainty, and so stocks began to fall.
Strategists may claim that markets have overreacted – and that this volatility is simply a small bump in a long road but it is difficult to ignore the figures. The FTSE 100 is down around 5%, as is the Dow Jones – the Nasdaq has lost double that.
Oil, energy and tech stocks have been hardest hit; at the time of going to press Glencore is down 10% and BHP Biliton has lost 7%. Companies with a large part of their revenues sourced from emerging markets – such as brewer SABMiller – have also taken a hit.
Adrian Lowcock, Head of Investing at AXA Wealth, says in such times it is important to keep your head and remain focused.
“August can be a challenging month. With many professional investors away on holiday there are fewer transactions which can lead to bigger swings in the market than may happen normally,” he said.
Is This the Beginning of a Bear Market?
This is the third bad week in a row for equities, the FTSE has fallen for 10 days – today it dipped below 6,000 for the first time in two years leading to many dubbing it Black Monday.
Laith Khalaf from Hargreaves Lansdown reminded investors that it was just five months ago there was elation as the FTSE broke through the 7,000 mark for the first time.
“However bleak things may seem today, there are reasons to be positive. A lower oil price will boost household budgets in the UK, Europe and the US, which should feed through into spending,” said Khalaf.
“Furthermore as long as lower petrol prices are keeping inflation down, central banks in the UK and US are unlikely to raise interest rates, providing a supportive background for companies and consumers.”
Should Investors Turn Contrarian?
Trevor Greetham, head of Multi-Asset at Royal London says this equity market sell-off has the potential to be a contrarian buying opportunity.
“China's stock market slide and some weaker manufacturing data have sparked a sharp sell-off in equity markets,” he said. “Our composite investor sentiment indicator has signalled one of the strongest contrarian buy signals on record with a depressed reading comparable with the onset of the great financial crisis in 2007, the Lehman failure in 2008 and the worst point of the euro crisis in 2011.”
Greetham says Royal London data suggests that following this market downturn there will be a strong bounce – especially if markets and governments are able to turn investor sentiment around.
