TWO weeks ago we were bemoaning the somewhat tumultuous start to 2016 in the markets - and little did we know what was to follow.
The last fortnight has taken most investors’ breath away, with headlines highlighting the fact that we are now officially in a bear market again as we have seen the market fall by more than 20 per cent since its peak last year (the official definition of a bear market).
January is usually a fairly benign month for investors – I have written about the “January effect” in previous years and there was certainly little to predict the massive volatility that we have just experienced.
There is no easy explanation for this experience: the slowdown in China is cited as is the tumbling oil price, but logically neither of these should have had the impact to cause such extreme conditions in global stock markets.
Take China, which has seen its growth rate slow to 6.9 per cent - yes, it is still growing, though you could be forgiven for believing it is firmly in recession – surely it had to see lower more sustainable rates of growth eventually? Is it such a shock?
The truth is that concerns are focussed on China’s ability to manage the slowing economy which for years now has been the “engine for growth” for the rest of the world. After all, growth rates of 2 or 3 per cent are more normal for western economies.
There are some reasons for concern, too, when one looks at the chaos of Chinese stock market trading in week one of this year, when the new circuit breaker came into force on Monday, but had been scrapped by Friday. This precipitous action does not inspire confidence in the Chinese government’s ability to manage the economy.
The other main factor under the spotlight is the oil price. We saw it dip below $28 a barrel last week – an unthinkable level a relatively short time ago: less than two years ago it stood at over £100 a barrel. This massive reversal of fortunes has been primarily brought about by a surplus in supply.
The oil price has been massively influenced by the likes of Saudi Arabia which has sought to preserve its position of strength in the oil producing fraternity by driving the oil price down in order to price out other producers which need a higher oil price due to the higher extraction costs. This has recently been further complicated by the imminent re-emergence of Iran onto the global oil scene.
However, all this should be positive for the UK, as we are a net importer of oil and it should have a beneficial impact on consumers as they see fuel costs falling as will industry in general.
There is one more factor at play here: sentiment. It seems that households are becoming more nervous and there are real fears that companies are seeing slowing earnings which will eventually translate into lower economic growth. This may well be the case – economic growth figures are due for both the UK and US this week – but in the meantime it is worth remembering that markets are notorious for their overreaction.
:: Cathy Dixon is a director at the Belfast office of Cunningham Coates Stockbrokers, which is a trading name of Smith & Williamson Investment Management (SWIM). This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
