Duncan Lawrie Online ▼

Posted on: 08 September 2015

The People's Bank of China sent shockwaves through global markets from 11 August when it began to devalue the yuan versus the dollar. It was a move that caused investors to fear that the second largest economy in the world was slowing much faster than originally thought (see our other Commentary article: 'China: currency concerns and implications'). Although the market falls have been significant, they have the feel of a summer correction, which is far from unusual due to the low market volumes typically experienced during the holiday season.

UK large caps were hit hard by the problems in China; companies listed in the UK tend to be more globally exposed. The market was down by 6.7%, while the more domestically focused mid- and small-sized companies were down by 3.1% and 1.1% respectively. At a sector level, the sell-off was surprisingly well spread, although stocks and sectors with high emerging market exposure were particularly badly affected.

In international markets, US equities held up reasonably well, with shares down 5.5% or 3.9% in sterling terms due to the dollar rally; which provided its traditional role as a safe haven in times of trouble. Emerging markets faced the biggest impact from the news from China, with equities in this area down by 9% in local currency terms. The Shanghai Composite itself was down by 12% during the month.

Fixed interest markets performed relatively well in August with the 10 year UK gilt strengthening slightly. At one point during the month, the 10 year gilt yield fell to 1.71%, whereas it had been as high as 2.2% in June. The US Treasury 10 year yield also tracked back to hit a low of 2%, despite consensus expectations that the Federal Reserve would begin raising interest rates in September. In light of the market volatility, there is a possibility that they will delay this until later in the year.

Although we believe that this month's market moves are a correction rather than a more serious downturn, it does herald a new period of volatility that is likely to be longer lasting. This is because the world's largest economy is moving to tighten monetary policy at a time when Europe, Japan and now China are looking to cut interest rates. It is rare for large and developed economies to deploy such widely different policy measures and the outcome is therefore uncertain - and uncertainty, as we know, generally leads to volatility.

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All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice  to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the  amount invested. Past performance is not a reliable indicator of future results.


 


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