How will the Chinese economy affect your finances?

The last week has been a pretty turbulent period for markets, to say the least. For that reason we thought it might be helpful to give you some industry commentary and address the question how is the fractured Chinese economy affecting the UK market?

A short overview of the current market conditions:

Global stock markets have seen some sharp falls during the past few weeks as concerns about the health of China’s economy have been brought into closer focus, sparking a wave of risk aversion and worry about disinflation.  The ripple-effect, seen most acutely in commodity markets and economies closely influenced by trade with China, has now extended from emerging markets across into mainstream developed markets. This has resulted in many leading stock market indices now trading at levels below those of the start of this year.

Market declines have, to some extent, been exacerbated by the holiday season when activity is generally quite low the market falls in the past week or so may have been quite acute, this is not reflected in any material increase in the volumes of trades being placed, suggesting that investors in more developed markets are generally sitting tight, rather than selling or disposing of holdings.

How are the different strands of the market weathering these changes?

It is also worth noting that many sectors and individual companies are largely unaffected by what is going on elsewhere in the world. The FTSE 100 Index, for example, is laden with companies heavily exposed to the commodity cycle and a large stream of international earnings, so any investor tracking such an index or invested in funds with an index-hugging style are likely to have felt the full brunt of the recent market declines.  In the year to date, the FTSE 100’s oil and gas sector stocks, including heavyweights BP and Royal Dutch Shell, have fallen over 15% in aggregate, and the mining sector has fallen almost 30%.

In contrast, the more domestically-focused real estate and household goods sectors have risen by more than 20%.  This highlights the importance of active management and being in a position to respond when market influences begin to alter. We believe that it is imperative that our clients have professional advice when it comes to their investments.

Furthermore, outside of the mainstream market sectors and larger companies, lie many medium and small-sized companies which are much less exposed to international trade and should be more resilient during this current uncertainty.  Several of our stock market-based funds have some good exposure to such companies right across the market capitalisation range, many of which are faring much better than the mainstream market indices.

What will the knock-on effects be for my investments?

Whilst the knock-on effects of a slowing Chinese economy are currently controlling market sentiment, in some areas there has probably been too much of an adjustment and we should probably expect a rally quite soon – we are already seeing some recovery today.  The rest will perhaps be when the bulk of market participants reappear after their summer breaks to uncover the longer term value which will undoubtedly have been exposed during the current market correction.  Also, we should not lose sight of the fact that the economic recoveries in the US and UK are gathering some momentum from domestic, rather than external, demand factors.

Furthermore, a further suppression of inflation from lower commodity prices could well postpone, yet again, the need for any rise in interest rates and provide a boost to consumer sentiment.  This should provide further support for stock markets. The expected rise in US interest rates, for example, pencilled in by most commentators for this September, which is contributing to the current market uncertainty could now be delayed, particularly if inflation remains very subdued. Similarly, any rise in UK interest rates could be nudged well into 2016.

It is disappointing to have retraced some of the good ground made earlier this year but we are hopeful that this period of uncertainty will be temporary and that some restoration of confidence will resume soon once investors are reminded of the good economic progress being made in several corners of the globe.  In the meantime we believe it is important to retain a focus on active management and, where relevant, a range of asset classes that will allow portfolios to withstand the current uncertainty relatively well and move forward again when the current storm passes.