How to navigate your way through turmoil
The summer is a traditionally quiet time for markets. Not so this year, when volatility was eye-watering. From 23 to 28 August the Dow Jones Industrial Average (US stock market index, which reached a high of around 17000 earlier in the year) moved up and down by a total of 5612 points. Bond markets, usually the safe haven when things go a bit awry were also in the eye of the volatility storm.
What on Earth was going on? The world blamed the slowdown in China and the government intervention in stock markets, while China blamed the US central bank for dithering over interest rate rises. But none of it was surprising news, so why the mayhem in the equity markets? As ever, it seems that it is all down to the inability of homo sapiens to act rationally. The second any creeping doubt (of which we have had much to ponder) translates into a "significant market move", the herd mentality kicks in and up and down we go. So what will the Autumn hold? Are there still doubters out there? Or will "rationality" prevail?
First, we must wait to see if there are any more Chinese economic policy initiatives ahead of the annual International Monetary Fund/World Bank meetings in Peru between 9 and 11 October. The Chinese government is learning the lessons of capitalism the hard way, but, as ever, it has the time and the potential of the world's largest economy on its side.
Then we have to navigate the anniversary of Black Monday (19 October 1987). Will the mere memory of the crashes spark more market turbulence? The European Central Bank then meets on the 22nd - the first meeting after the Greek elections - and the Federal Reserve on the 27th and 28th. Of course, the central banks hold the key to market movements, but will there be any progress, given the US will be 10 days away from its election? I very much doubt it.
Looking at all the funds available to UK retail investors since the start of the year, performance is very varied. The UK Smaller Companies sector has fared the best amid all the turmoil and, at the time of writing, is still posting a positive return of 12% on average - and Elite Rated Marlborough Special Situations is up 14.25%. Despite this run, smaller companies are still good value versus their own history, so if you don't have exposure to this sector (surprisingly, it is very much under-owned by UK investors), it may still be a good time to get some.
Less surprising are the sectors which have lost money this year. Emerging Market funds are down 13% on average, but it's not China that has come off worse. In spite of the huge market correction, Chinese equity funds are down less at 10% and it is Latin America - specifically Brazil - that has posted the biggest losses. The worst fund, in terms of performance so far this year, is HSBC GIF Brazil Equity - down 36%. Energy funds are not far behind.
So is this a buying opportunity for these sectors? I'm not convinced. I see no catalyst for change yet in either Latin America or commodities and China's woes are likely to continue for a while to come. A lump sum investment could prove painful, but monthly investments into more defensive funds such as Charlemagne Magna Emerging Markets Dividend or Invesco Perpetual Hong Kong & China might prove fruitful over time.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. McDermott's views are his own and do not constitute financial advice.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.