Quantcast
Menu
Save, make, understand money

Experienced Investor

BLOG: The facts behind the falls

Maike Currie
Written By:
Maike Currie
Posted:
Updated:
25/08/2015

If you’re still reeling from yesterday’s plummet in global stock markets – don’t worry, you’re not alone. Investors around the world watched in horror as the biggest one-day fall in China since 2007 quickly spread to other stock markets across the globe.

This morning, Chinese markets continued their downward spiral, although the overall market mood is calmer. But you can’t blame investors for being worried, after all the last time we saw markets fall so far and so fast was during the dark days of the financial crisis. This vicious downturn is still burnt into the memory of many savers and investors and many are decidedly cautious, seeking shelter in safe haven assets such as government bonds and gold.

So what was behind yesterday’s stock market spiral? Simply put: a slowdown in emerging markets. For very long economies across the globe relied on emerging markets to fuel growth, and in particular China with its seemingly insatiable appetite for commodities.

Now as these locomotives of global growth slow, it’s having an impact on equity markets. Much like the crisis of the late 1990s the rout started in the currency markets – China was the first to weaken its currency against the US dollar, with other emerging markets quickly following suit. From there the downturn quickly worked its way into commodity markets and broader stock markets.

A cocktail of worries is weighing on emerging markets, most notably the fall in commodity prices, a strong dollar and a lack of reform. This doesn’t mean there are no more opportunities in this space, it simply calls for greater selectivity. Nick Price, manager of the Fidelity Emerging Markets Fund points to countries like India – a net importer of commodities, which benefits from favourable demographics and a consumer with rising spending power, and areas like the internet – where the emerging market countries still have a lot of catching up to do.

An experienced stock picker can unearth these investments for you and take advantage of short term volatility to buy on the dips. A passive fund, as I have said before, will buy all of the problems along with the opportunities.

In an increasingly global and interconnected world, developed markets are not immune to what’s happening within their emerging market counterparts, however the economic recovery in the UK and US remains on track, and we could see these markets recover relatively quickly from the recent falls. The UK market has already climbed higher today, passing the 6,000 mark and ending its longest losing streak since 2003.

It’s also worth noting that as emerging markets weaken their currencies, the goods they export to the developed world will become cheaper. This coupled with falling commodity prices, in particular oil, will keep a lid on inflation. This means consumers in countries like the UK and the US will enjoy a boost to their real income – falling prices mean more pounds in your pocket. More pounds in your pocket means you can spend more, which in turn bodes well for overall consumer spending, which is still the backbone of the UK economy.

But low inflation can also be a double-edged sword, as it means interest rates remain lower for longer. Remember interest rates are the tool which central banks use to control inflation but with inflation as low as it is, the toolbox will remain unopened. This means low returns for longer and savers, investors and retirees will have to contend with slim pickings when it comes to unearthing investments that pay a decent return.

Anyone seeking a stable income will need to look to the stock market for better returns, in particular companies that boast strong cash flows, steer clear of debt and have pricing power –the ability to increase prices regardless of what’s happening in markets or the broader economy.

Think of companies with what legendary US investor Warren Buffett refers to as strong ‘moats’ where the company is the castle and the moat is its competitive advantages whether this is a strong brand, product or something else that allows it to hold on to its long-term profits and market share from competing firms.

As long as the moat doesn’t dry up, companies that have pricing power through their brand names are safe havens in a disinflationary environment. Funds such as Nick Train’s CF Lindsell Train UK Equity Fund and Terry Smith’s Fundsmith Equity Fund are good ways to play this theme. Alternatively, equity income provides yield with the prospect of growth as well via funds like Michael Clark’s Fidelity MoneyBuilder Dividend Fund.

[article_related_posts]