The financial news this week has been dominated by “Black Monday” – the worst day for stock markets since the global financial crisis. Poor economic data from China, the world’s second largest economy, sparked a frenzy of selling. Given the extent of the selling and the fact we are in a traditional holiday period for traders, many believe concerns over a full-blown crisis are overdone and that a bounce back is on the cards. The FTSE100 had one of its worst days since the financial crisis on Monday, but one of its best days ever on Thursday, finishing 0.9% higher than the start of the week.
Equity markets had already been on a downward trajectory since April, owing to a variety of concerns such as a spike in government bond yields, uncertainty surrounding the Greek debt negotiations and fears over China’s economy. Although China’s published rate of economic growth had not slowed much from the 7-8% of recent years, there had been signs that the transition from growth led by exports and infrastructure spending towards a more conventional pattern of consumer-led activity has not been as smooth as the authorities would have hoped.
The fact remains that long-term investors should not react to short-term news. The average fund in the balanced sector (mixed investment 20%-60% shares) has fallen by 5.5% in the past 3 months, but has still broken even over the past year and gained 16.1% over the past 3 years. In the global equity sector, the average fund is down 9.7% in the past 3 months, but just 0.8% over the past year and has gained 30% over the past 3 years.
The events of the past week have increased the likelihood that the long-awaited rise in US interest rates will be put back. Just the hint of an interest rate rise has been enough to knock back investor sentiment on several occasions in the past few years and prompt significant market falls. The Federal Reserve is due to meet on 16-17 September and a rate rise had seemed likely, but the case is now “less compelling” as one Federal Reserve official stated this week.
Markets were then boosted further as revised figures have shown that the US economy grew by far more than previously thought between April and June. The economy grew by an annualised rate of 3.7%, up from the first estimate of 2.3%. Growth of 0.6% in the first three months of the year was not revised. The second-quarter revision reflected greater corporate investment than previously estimated. The growth in the economy overall was due to strong consumer and government spending, and higher exports.
Meanwhile in the UK, the CBI has upgraded its estimate for growth this year from 2.4% to 2.6%, and from 2.5% to 2.8% next year. The upgrade by the CBI, which represents thousands of businesses across the country, is attributable to long-awaited signs of recovering productivity in the first half of this year feeding through to stronger wage growth.
The consensus of opinion is that we are not in a normal economic cycle whereby boom follows bust. While interest rates have been at rock bottom, consumers and companies have exploited them either to repay debt or refinance at lower rates of interest – rather than taking advantage of low rates to borrow more.
The eurozone’s annualised rate of inflation remained unchanged at 0.2% during July. Despite the Greek crisis, the IMF maintained its forecast for economic growth in the eurozone over 2015 at 1.5%.
Closer to home, the latest official figures show that NI house prices have now recovered to 2005 levels. Figures for the year to June show that Northern Ireland was the fastest growing area in the UK, with prices increasing by 9%.
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The value of your investment can go down as well as up and you may not get back as much as you originally invested.