Markets are moving back into panic mode with investors continuing to capitulate on long positions. The current rout began on the 11 August 2015 following a decision from China to begin de-valuing its currency. Since then we have seen steady selling pressure throughout global markets, which hit a crescendo on Monday 24 August 2015, now widely being called ‘Black Monday.’
As Shares goes to press on Tuesday 1 September the FTSE 100 index stands at 6,100, nursing a rough 150 point bloody nose on the day and about 1,000 points, or 14% off the record close of 7,104.00 on 27 April. High levels of volatility and low levels of liquidity have created a perfect storm for global markets. At its worst point in intra-day trading the FTSE 100 had lost £56 billion from its market value, while the US’s Dow Jones’ 1,000 decline at opening on 24 August is one of its deepest one-day drops since the height of the financial crisis in 2008.
The main reason for this collapse in share prices is fear of slowing growth in China, which triggered widespread falls in China’s stock market, and global stock markets followed suit. ‘Commodity prices also dropped over concerns of falling demand from China, one of the world’s largest consumers of commodities, and with many of the commodity producing companies listed on the FTSE 100, this has dragged down the performance of the index,’ says Mark Dampier, head of research at Hargreaves Lansdowne.
These moves are also being exacerbated as critical risk levels at various fund managers and hedge funds are now being activated, meaning that large volumes of stock are being offloaded into an already fragile market place.
(Click on chart to enlarge)
Bigger picture
To pace the question of what this all means for investors, analysts at investment bank UBS have looked at correlations between China and other so-called emerging markets, and more developed markets elsewhere, including those in the UK.
Their first observation was the length of time it took developed markets to reflect the changing circumstances in China, pointing out that while the Chinese equity market had seen a wave of sell-offs over the summer, developed markets were largely unaffected. This might be explained to a degree by the relatively low level of exports going from the eurozone to China, only 3.1% of all eurozone exports, according to UBS’s calculations. Even US sales into China only account for about 8% of its total export book.
But that situation has changed abruptly and rapidly during the past week and a half. ‘The trigger appeared to be the August Chinese manufacturing PMI (Purchasing Managers Index) of 47.1, which fell well below expectations. ‘The size of the market reaction was surprising,’ says UBS, ‘because decelerating growth in China has been part of the investment backdrop for several years and is part of government policy.’ In other words, while the sharpness of the decline may have caught economists and analysts out, the overall trajectory had been well flagged and shouldn’t really have shocked experts.
The short-term implications may be that there is far more limited scope for US interest rates to rise, and Hargreaves Lansdowne’s Dampier goes further. ‘It suggests there is no possibility of a rise in US interest rates this September, nor December, in my view.’ But while the oversupply of commodities against global demand persists, this could filter through to a consumer spending bonus down the line. Dampier believes that such a situation would ‘be good in due course for the developed world as falling oil prices will feel like a tax cut for many consumers. I don’t think we are far away from seeing 100p a litre for petrol and diesel,’ he predicts.
Small world
If large and midcap stocks can get caught in a short liquidity squeeze, you can imagine what happens to the relatively thinly-traded shares down at the small cap end of the market, or on AIM. Most of these companies will have little or no exposure to overseas economies, yet rather than remaining detached from macro economic data, share prices are getting bashed about left, right and centre.
True, many, if not most, will have reacted to company news. Tool hire firm HSS Hire (HSS) collapsed again on another profit warning on 26 August, Mobile Streams (MOS:AIM) is off 30% in a week thanks its own profits alert, and there are countless others.
But what about those companies that have been marked down heavily on no news? Scheduling software supply minnow ServicePower Technologies (SVR:AIM) won three new contracts in North America on 12 August, yet its shares are off more than 9% over the past week. Mobile TV tech firm Motive TV (MTV:AIM) may have run up bigger losses than expected thanks to product development, but it has equally won a several new bits of business lately, including one with a satellites company which the company says should be worth ‘significant value.’
For many retail investors interested in the small cap space the best course of action will have been to do nothing. It might not sound like a terribly proactive approach, but so what, being proactive is not a positive per se. Knowing when to do and when to dither is about timing and maintaining a rational view amid a panic. UBS, as do most analysts it seems, see market volatility remaining a feature across equity markets here and abroad for some time to come, and there is the distinct possibility that there could be a ‘spill over of negative sentiment from China into global markets,’ as the investment bank’s analysts put it.
‘There is no place for heroes in this type of market,’ say analysts at derivatives trading house Central Markets, ‘investors can get crushed in the space of hours if they try to catch falling knives.’
Markets are cyclical and these type of sell-offs are rare but not unusual. Sooner or later, the liquidity squeeze will ease and volatility will subside, and once the dust settles there will be opportunities for everyone. ‘There may well be further falls to come, but in my own portfolio I have used the recent market weakness to start topping up my Emerging Markets and UK Equity Income holdings,’ concludes Dampier.
