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Billed as the “Great Fall of China”, stock markets around the world plunged on Monday in response to fears that China’s economic growth was running out of steam — only to bounce back and recover their weekly losses by Friday.

In a rollercoaster week for investors, the FTSE 100, S&P 500 and FTSE Eurofirst 300 all briefly went into correction territory — a fall of more than 10 per cent — but stock markets in Germany and emerging markets witnessed falls of 20 per cent or more from their peaks due to their greater exposure to China.

See-sawing stock markets were accompanied by better than expected economic data from the US, underlying the dilemma facing central banks over whether to raise interest rates.

Some economists argue that this backdrop has increased levels of skittishness in the markets, pointing to the potential impact of a rate rise on global liquidity. While this week’s events are being described as a correction, rather than a crash, the global outlook from economic forecasters can best be summed up as “fear, but not panic”.

For private investors taking stock of their portfolios, here are the questions you need to ask as you prepare to navigate future volatility:

How worried should investors be about events this week?

China was the catalyst for this week’s sell off. The Shanghai Composite Index slumped on “Black Monday” after Beijing enacted a surprise currency devaluation, followed on Tuesday by cutting interest rates.

While markets elsewhere have largely rebounded, the Shanghai index finished 8 per cent lower on the week.

Traders can play the short-term markets, but investors need to think long term. This week, advisers urged investors not to panic, to take any actions in stages, and consider how to diversify their holdings.

Data from trading platforms show that private investors used the volatility to buy into some of the UK’s biggest listed companies.

The Share Centre reported three times the usual amount of trading activity on Monday, with 42 per cent of trades being FTSE 100 listed stocks. Lloyds, GlaxoSmithKline, BP and Royal Dutch Shell were its most popular traded stocks on that day, but overall 45 per cent of orders were buys, and 55 per cent were sells.

It was a similar story at direct-to-consumer investment platforms including Barclays Stockbrokers and TD Direct — though a survey of more than 8,000 clients of Interactive Investor carried out for FT Money showed that 78 per cent had not been tempted to buy stocks, bonds or funds as the markets fell.

Mike McCudden, head of derivatives at Interactive Investor, says: “The panic button has not been pushed by ‘have and hold’ investors.”

Looking forward, equity markets — and “bond proxies” in particular — still look overpriced. Commodities are cheap for a reason, as prices have been driven down by declining demand from China, though brave contrarians may now be sizing up the sector. Many investors may choose to sit on cash, and wait for bigger falls to bring more attractive buying opportunities.

Which areas suffered the most?

The FTSE 100 was hit harder than many other developed market indices because of its overseas-facing companies, many of which are exposed to China and other emerging markets. Its largest names include miners and oil companies, categories that have suffered far more than companies focused on UK consumers.

While the index has bounced back, this week’s events were a wake-up call for those invested in passive funds that track the market.

“You may be happy that over the long term it will even out, but investors need to be aware that passive funds are large-cap dominated and will hold many companies that have already risen in value,” says Laith Khalaf, senior analyst at Hargreaves Lansdown.

“There is a real risk of a hard landing for China and therefore we think there is scope for further losses on commodity funds and emerging market investments despite the already significant declines,” says Jason Hollands, managing director at Tilney Bestinvest.

Which investments provided the best insulation?

Active managers of UK equity funds shielded investors from the worst of this year’s market turmoil, with almost seven in 10 performing better than the falling FTSE 100 and FTSE All-Share indices.

A focus on the UK domestic economy has saved many funds from a battering at the hands of international markets. Before this week’s volatility, funds such as Standard Life’s UK Opportunities and UK Ethical funds each shed about one per cent over the past month, according to figures from FE Analytics, even as the FTSE 100 dropped 7.2 per cent.

Two Miton funds, UK Value Opportunities and Undervalued Assets, each declined by less than four per cent over the same period. All four of these funds made returns of at least 10 per cent over the past year, even as the FTSE 100 was down 10.9 per cent. The Miton Undervalued Assets fund has a particularly strong record over three years, returning 80 per cent to investors over that period and placing it in the top 1 per cent of funds.

“We’ve seen wages growing ahead of inflation and now consumers can make the decision to spend that on things like TVs and cars. We are overweight companies that benefit from that,” says Henry Flockhart, investment director at Standard Life.

Similar patterns are evident across UK actively managed equity funds, according to statistics from Hargreaves Lansdown and Lipper. A focus on domestic-facing stocks rather than FTSE 100 mega-caps has helped 60 per cent of active funds to beat the highest-performing tracker over six months, and almost 70 per cent over the past three months, according to Lipper.

Jake Moeller, head of UK and Ireland research at Lipper, notes that UK equity income funds had fared well thanks to their naturally defensive positioning, while utility stocks have also helped many of the better-performing funds.

“Some fund managers have eschewed utilities because of the level of state ownership but anything which has exposure to inelastic demand is going to be much more buoyant at the moment,” he says.

Where do fund managers sense buying opportunities?

Mr Flockhart at Standard Life Investments says he was looking this week to add to his existing holdings in FTSE 100-listed Burberry, the luxury fashion retailer, which has seen its shares slide by almost 28 per cent since its peak in February thanks to its exposure to Asian markets.

“That’s obviously been hit by the slowdown but it’s the kind of long-term story that we’d still be happy to add to. It’s about the middle classes in emerging markets and it’s away from the infrastructure-driven growth that we’ve seen,” Mr Flockhart says.

Georgina Hamilton, co-manager of the Miton UK Value Opportunities and Miton Undervalued Assets funds, says lower stock prices had enabled her to top-up holdings in domestically focused UK companies with strong balance sheets.

The Miton managers have favoured companies in areas such as home maintenance and improvement, and retailers such as JD Sports. They also hold housebuilders such as Bellway and Barratt. This is a sector that the Standard Life managers also view positively, holding stocks such as Galliford Try and Crest Nicholson. They have been using the market turbulence to top up their holdings.

“Our large overweight in the housebuilding sector has worked very well for us, particularly since the general election [in May],” says Lesley Duncan, investment director at Standard Life.

However, it is hard to find a fund manager who thinks that oil or mining stocks are cheap.

“A number of oil companies and miners have looked overly leveraged to us, with too little cash flow in the context of their leverage,” adds Ms Hamilton. “They need not only to be cheap, but have a strong balance sheet.”

Further afield, global asset managers say European equities look more attractive.

“For investors, one key takeaway is that selling has restored value in some areas of the market, particularly in Europe,” says Russ Koesterich, global chief investment strategist at BlackRock, the world’s largest asset manager.

Companies exposed to global trade, especially in Germany, have been particularly punished, he says, leading to German stocks now trading at less than 12 times forward earnings and 1.5 times book value — about 45 per cent lower than the US market.

Deutsche Asset & Wealth Management says it also saw value in European equities, but was more cautious about emerging markets, which have been most directly affected by China’s turmoil.

Some managers were even more cautious, however. F&C’s multi-manager team, headed by Rob Burdett and Gary Potter, says the current “heightened volatility . . . does create opportunities for investors, but for the moment we are staying patient and not significantly adding to positions”.

Should I panic about my pension?

Savers who do not have to access their pension for a number of years have been advised to sit tight as losses should be recouped over the longer term, but those who have entered drawdown have more to fear.

Pension provider Hargreaves Lansdown has put together an action plan for retirement savers in drawdown plans. The first thing it suggests is for pensioners to keep at least one year’s income in cash in their pension plan, to serve as a buffer during extreme markets.

Hargreaves also recommends limiting withdrawals from a drawdown plan. “Falling markets could have a significant impact on those drawing too much from their pension plans,” says Danny Cox, head of financial planning at Hargreaves. “Spend too much and the drawdown plan can suffer irreparable damage.”

The third piece of advice is for savers to draw income from the underlying assets in the plan not the capital, to avoid exacerbating losses. “Investors who stick to a natural yield strategy should be better placed to navigate choppy waters,” says Mr Cox.

The fourth point is a rudimentary one: ensure your portfolio is diverse and balanced with a mixture of assets including cash, fixed interest products and shares to protect it during market falls.

What about bonds?

Bonds tend to do well during times of market volatility, particularly those in perceived “havens” such as UK and German government bonds. Prices in both markets rise when investors are worried about the rest of the market.

Yields on ten-year UK gilts, the market benchmark, fell below 1.7 per cent this week, although they have since climbed back to 1.9 per cent as the situation calmed.

If wider market volatility continues and investors push back their expectations for interest rate rises in the US and UK, then money could keep pouring into gilts, meaning that yields will keep tracking down.

Investors who have taken more risks with their money, putting it into, say, emerging market bonds, will have experienced a difficult week. According to JPMorgan, total returns on emerging market bonds denominated in local currencies are now down by 12 per cent in the year to date.

Nevertheless, it is notable that bonds have not experienced the same drama as equities, commodities and currencies. Where prices go from here will depend on what China and the US do next.

Will volatility delay an interest rate rise?

Regulators in the US and UK have dropped hints that the turmoil is likely to push back a rise in interest rates. Predictions that Federal Reserve would raise US interest rates in September are looking shaky: William Dudley, a top Fed official, told a conference this week that the case for tightening monetary policy as early as September “seem[s] less compelling to me than it was a few weeks ago,” though his comments were followed by stronger-than-expected economic data.

The speed of a UK rate rise had already been a matter of debate after only one member of the Bank of England’s Monetary Policy Committee voted for a rise this month. The volatility on stock markets is likely to reinforce such a view.

Another reason to think rates may stay at their record lows is the recent drop in the oil price. Placing aside Thursday’s “short squeeze”, falling commodities prices mean economists are reviewing their earlier expectations of inflation rises towards the end of the year. For now, consumer price indices may well remain flat or even retreat into deflation territory, discouraging a rate boost.

What could this mean for the property market?

Mortgage lenders have been showing little consensus in recent days over the direction of the market. Ray Boulger, technical director at broker John Charcol, says: “Some lenders have been putting rates up a bit; some have been putting them down; some have been putting some up and some down.”

But in the medium term, the longer the wait for a Bank of England rate rise, the longer borrowers have to take advantage of record low interest rates on fixed-term mortgages.

“It does seem to me that the first rise in the bank rate has got to be put back, so from a cost point of view that has to be an advantage,” Mr Boulger says.

Property observers have speculated on the impact of Asian turmoil on the demand for top London property among overseas buyers, traditionally a key part of the capital’s prime market. But rather than constraining demand, some believe the events of the past week will stoke it, much as the eurozone crisis of 2010 brought an influx of Italian, French and Greek buyers to London.

Grainne Gilmore, Knight Frank head of UK residential research, says there had been an intensification of interest from Chinese buyers. “The extra volatility has enhanced London’s reputation as a safe haven property market.”

Yolande Barnes, head of Savills World Research, agrees that wealthy overseas buyers looking to diversify their portfolios could give a boost to the top end of the London market. But the effect would be small and balanced by slower wealth creation and lower levels of investment. “Ultimately, the net effect is likely to be neutral.”

Reporting by Judith Evans, Claer Barrett, James Pickford, Lucy Warwick Ching and Elaine Moore.

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