A stormy start to 2016

Equity markets have taken a beating over the last week, recording one of the worst starts ever to a calendar year. No doubt your clients have been in touch with you about the falls most notably in the FTSE 100 (-5.94% year to date). The woes have been exacerbated as investment banks and other analysts have been quite negative over the past 24 hours.

So, using our expertise, we’d like to give you a summary on what has happened so far this year, where this has affected markets and what our thoughts are regarding the future.

What has happened this year?

Principally there are two factors that are giving the market great concern: the first is the haphazard intervention being made by Chinese authorities into the equity and foreign exchange markets, and the second is the extreme weakness of the oil price.

China

There has been a lot of talk on ‘circuit breakers’ put in place by Chinese regulators. They were meant to limit the possibility of hot money flowing out of the equity market by stopping trade in Chinese equities following 5% and 7% falls in the market. These were initially discussed in September 2015 and came into effect on 4 January 2016. They were triggered twice and binned by the end of the first week of trading, so clearly not a resounding success.

Secondly, China announced last August that it was planning to tinker with its complex foreign exchange arrangements, which caused the initial sell-off witnessed in global equity markets. Since then, it’s accelerated its plan to devalue the currency, most notably last week, when Chinese authorities acted to further weaken the value of the Yuan – this move was poorly communicated, which sent shockwaves through markets that were already low on confidence.

Oil

By the end of 2015, the oil price had fallen two thirds from the August 2014 high of $110per barrel to the astonishing level of $37p/b. This year, we’ve seen further weakness in the oil price, falling a further 16% with Brent currently priced at $31p/b. The weak oil price is in part driven by low confidence in global growth, as the Chinese malaise spills into other areas affecting sentiment. But, in what has already been a busy year, we have had further issues in the Middle East as political tensions between Saudi Arabia and Iran heighten, with the glut of oil supply appearing unlikely to abate in the near future.

How has this affected markets?

As mentioned above, equity markets have been significantly impacted, with developed market bourses from London to New York and Tokyo falling between 5% and 7%; the Chinese equity market clearly has had a dreadful start to the year, with Shenzen A Shares falling nearly 20%.

As you expect in times of low confidence, we have seen classic ‘flight to quality’ trades across the board. We have seen a significant rally in government bond markets, particular gilts, US treasuries and German bunds. The yield on the 10 year gilts has fallen this year from 1.99% to 1.81% as demand has increased. Also, we’ve seen further strength in the US dollar, which has rallied against most currencies and currently sits at $1.44:£1, as strong as the dollar has been relative to sterling since the financial crisis of 2008/09.

What are the implications?

China is the overriding factor within these discussions. So, we must consider whether what’s happening is a short-term issue (a financial market correction) or something affecting longer-term potential for the economy.

We believe two things: firstly policy makers in China have been poor in managing financial market expectations over recent weeks, as highlighted by the aforementioned forays into the equity and forex markets. Secondly, and more importantly, some of the changes put in place are actually quite logical. The Yuan had previously been pegged to the US dollar, for example, and one of the policies put in place has been to remove that strict peg and peg it to a trade-weighted basket of currencies. This move is more about the relative strength of the dollar rather than the requirement to weaken the Yuan, and should serve to improve the export prospects for Chinese companies. As China transitions from its ‘old’ industry-heavy economy to a newer services driven economy, we’ll continue to see steady growth, albeit growth at a lower rate than experienced previously.

Additionally, while sentiment is clearly in a state of heightened alert, there has been little to alter the global growth picture. Growth in developed economies, perhaps best illustrated by the world’s largest economy the United States, is predicted to be low yet steady at around 2% for the next five years. Although some data since the start of the year has been mixed, we’ve seen strong employment figures from the US as well as supportive services sector stats across a number of economies. This isn’t being reflected in financial markets at present, but we must remember that services form the largest part of many of the world’s biggest economies.

How have portfolios reacted?

At Rathbones, there has been no knee-jerk reaction or dramatic alterations to asset allocation following the recent falls in equity markets. In fact, where cash is available for newer clients, at the margin we see this as a buying opportunity.

We are of course not rigid in our view and are willing to change our opinion if we see deterioration in longer-term economic factors. One such consideration would be if we saw a marked fall in service sector data, most notably in China - we currently don’t see this.

To summarise, we continue to feel, as difficult as it is, that the recent market movements are down to shorter-term issues rather than anything more long term. The economic growth picture remains modest but we continue to feel that there will be growth and that this needs to be reflected in asset prices. However, markets are likely to remain volatile.

Important legal information

This area of the site is for professional advisers

Please read this page before proceeding, it explains certain legal and regulatory restrictions applicable to the distribution of this information. It is your responsibility to inform yourselves of and to observe all applicable laws and regulations of the relevant jurisdiction.

This section of the website is directed only at investment advisers and other financial intermediaries who are authorised and regulated by the Financial Conduct Authority (FCA).

The information provided in this site is directed at UK investment advisers only and must not be circulated to private clients or to the general public. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

I confirm that I am an investment intermediary authorised and regulated by the Financial Conduct Authority. I have read and understood the legal information and risk warnings below:

Important Information (Terms and Conditions)

The information contained on this site is believed to be accurate at the date of publication but no warranty of accuracy is given and the information is subject to change without notice. Any opinions or estimates included herein constitute a judgement as of the date of publication and are subject to change without notice. Furthermore, no responsibility is accepted for the accuracy of any information contained within sites provided by third parties that may have links to or from our pages.

Rathbone Investment Management Limited ("RIM") is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered Office: Port of Liverpool Building, Pier Head, Liverpool L3 1NW. Registered in England No 01448919.

In accordance with regulations, all electronic communications and telephone calls between Rathbones and its clients are recorded and stored for a minimum period of six months.

The information provided in this site is directed at UK investors only. It does not constitute an offer to sell, or solicit an offer to purchase any investments by anyone in any jurisdiction in which such offer or solicitation is not authorised or in which a member of the Rathbone Group is not authorised to do so.

In particular, the information herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in France and the United States of America to or for the benefit of United States persons (being resident in the United States of America or partnerships or corporations organised under the laws of the United States of America or any state, territory or possession thereof).

In order to comply with money laundering and other regulations, additional documentation for identification purposes may be required.

Rathbones shall have no liability for any data transmission errors such as data loss, damage or alteration of any kind including, but not limited to, any direct, indirect or consequential damage arising out of the use of services provided or referred to in this website.

Past performance should not be seen as an indication of future performance.

The value of investments and the income from them can fall as well as rise and you may not get back the amount originally invested, particularly if your client does not continue with the investment over the longer term.

Changes in the rate of exchange between currencies may cause the value of an investment to go up or down.

Interest rate fluctuations are likely to affect the capital value of investments within bond funds. When long term interest rates rise the capital value of units is likely to fall and vice versa. The effect will be more apparent on funds that invest significantly in long dated securities. The value of capital and income will fluctuate as interest rates and credit ratings of the issuing companies change.

Tax levels and reliefs are those currently applicable and may change and the value of any tax advantage will depend on individual circumstances.

Investing in emerging markets or small companies may be potentially volatile, as these investments are high risk.

The design, text and images are owned, except as expressly stated by members of the Rathbone Group. They may not be copied, transmitted, displayed, performed, distributed, licensed, altered, framed, stored or otherwise used in whole or in part or in any manner without the written consent of Rathbones except to the extent permitted and under the procedures specified in the copyright Designs and Patents Act 1988, as amended and then only with notices of Rathbones' rights.

Rate this page:
No votes yet

We’d love to hear your feedback

Please help us improve and shape our future services and products by taking a short survey.