Overdone.

24th August 2015

Ian Copelin, Investment Director, my wealth comments “What a difference a week makes!  Last Tuesday the S&P500 index touched 2,103.11 – just 27.7 points or 1.3% from its all-time high made on 21 May 2015.  Since then the US equity market has fallen sharply amid a global sell-off caused by concerns over Chinese growth (the world’s second largest economy) and emerging market currencies.

Unfortunately, last week’s sell-off has resumed again this morning after the Shanghai Composite index fell 8.5% overnight as government intervention failed to help, coupled with the continuing military standoff between North Korea and South Korea.  As I write, the FTSE-100 is down 175 points, or 2.83%, at 6,012, while the S&P 500 is expected to open down around 40 points at 1930.

Whilst these big falls are ugly and the negative news headlines and bearish sentiment may be unsettling, it is important not to panic:  in these environments equity markets often overshoot on the downside and decouple from fundamentals.  It should be noted that most major equity valuations are now lower than at the start of the year despite the fact that we have had a decisive UK election; economic growth is returning in Europe; globally central banks are more accommodative now than they were in 2014 (since the start of the year the European Central Bank has introduced a €60bn per month asset-purchasing/QE programme, (Quantitative Easing) while the Bank of Japan increased its QE programme US$60bn per month.  In addition, numerous central banks have reduced interest rates); Greece has reached an agreement with the troika and will remain in the euro; and oil has slipped below $45 a barrel for the first time since March 2009 (a huge positive for consumers and economic growth).

While I cannot say for certain that the current selling is overdone, the fall in oil prices coupled with accommodative monetary policies will act as a tailwind for global growth and are significant long term positives for equity markets.  If you are prepared to tolerate some potential short-term volatility now could be an opportune time to add to your investments.”