Market Update - 20th January 2016

Mike Deverell, Partner & Investment Manager 

The headlines in our media are increasingly focusing on stockmarket and financial matters.

From China’s slowing growth - the top story on BBC news on 19 January - to last week’s “Sell Everything” headlines in the newspapers, there is an increasingly pessimistic tone in our media. Of course, when everything is going well in markets then there are no headlines at all!

If you believe the media hype right now, you would be forgiven for believing we are on the verge of another major market collapse.

Over the 12 months to close 18 January, the FTSE 100 has dropped from 6,585 to 5,779, a fall of almost 12% in price terms or 8.4% if you factor in dividends. It is always the FTSE which grabs the headlines but we don’t just invest in the stockmarket and, when we do, we don’t just invest in the FTSE. Whilst the FTSE is down substantially, a typical Equilibrium balanced portfolio is just about positive over the past year.

A zero annual return is not great and is not what we aim for but zero or negative annual returns will happen from time to time and are not anything to panic about. It is just a bit less than cash and in line with inflation!

Given the recent coverage, we thought it was worth issuing a short market briefing about what has been happening in the investment world. In our view, things are not nearly as bad as the media would have you believe.

Markets have been particularly volatile since the start of this year. Any small piece of news regarding China or oil sparks a huge overreaction. Whilst we are being cautious, we think there is nothing fundamentally dreadful going on. Rather a number of issues have all arisen at once:

1. Slowing growth in China
2. An increasing supply in oil and gas partly as a result of new fracking techniques
3. Interest rates going up in the US with speculation of further hikes. Which leads to…
4. …A rising dollar
5. Falling energy prices as a result of points 1 (reduced demand), 2 (increased supply) and 4 (strong dollar)
6. Falling profits in energy and commodity related stocks as a result of point 5

Stockmarkets have fallen because of all these interlinked factors, especially the FTSE 100 which has more energy and mining stocks than many other markets. For more information and further thought on media and markets, as well as the under reported effect of the strong US dollar, see my blog from last week “Don’t sell everything!”

Incidentally, whilst that BBC headline may have talked about China’s slowest growth for 25 years, the markets were up strongly after that news, even if they have dropped again since. Growth was in line with what was expected and it was generally a reasonably decent set of figures.

Fundamentals vs Sentiment

Fundamentals are reasonably sound. The global economy is still largely ok and the US and UK remain strong. Unemployment is low on both sides of the Atlantic and earnings are up. However, we acknowledge sentiment is poor. Partly this is because memories of the credit crunch still loom large. The first sign of a correction and ill advised investors run for the hills.

Our analysisshows that a 10% fall happens pretty much every year and a 20% fall happens around every 4.8 years on average. Volatility is a fact of life in the stock market and most of the time we see a pretty sharp recovery after major falls.

In our opinion volatility means opportunity and the future is far less bleak than the media would have us believe. However, at the same time we are being cautious and are conscious of the risks in portfolios and will manage your money accordingly.