On 3rd September this year, the FTSE 100 index briefly touched 6,898.62: this was within 52 points of the all-time high of 6,950 reached in the final trading session of 1999.
Since then the FTSE has fallen significantly. At the time of writing this update, it stands at 6,367 – down more than 500 points (nearly 8%) from September 3rd.
Not surprisingly, many clients are worried by this and have asked us why the fall has been so sudden and so dramatic.
We therefore thought it would be useful to set out some notes explaining the fall and trying to put it into context. Hopefully, this will reassure our clients.
Perhaps the first thing to say is that the FTSE is not alone: the major stock markets in Europe have also fallen, as have stock markets around the world. As you’ll see below, the UK is doing well compared to other economies: but these days we live in a global market and the UK stock market is as much affected by events overseas as it is by what’s happening at home.
The rise in the UK and European stock markets on September 3rd was on hopes of a ceasefire in the Ukraine conflict. True enough, there is now an uneasy truce in the region (with Vladimir Putin taking time off from the Russian Grand Prix to order his troops to pull back from the Ukrainian border) – but as the dust has settled in the Ukraine, so the focus of world discontent has moved elsewhere. Several events have happened at once and this has created a lot of uncertainty; the one thing stock markets dislike above all others.
First of all the UK – along with a host of partners – is now committed to taking action against the Islamic State (IS). As you’ll know if you have seen the news recently, the coalition partners are currently relying on air strikes as the battle rages for the strategically important town of Kobani. What’s already becoming clear is that the battle against IS will not be over quickly – military strategists are already talking of ‘years not months’ – and markets are naturally worrying about the cost of a sustained conflict.
Sometimes, though, stock markets do overreact to military situations. Many of you will remember a day in the Second Gulf War (fought in 2003) when our tanks became ‘stuck in the desert.’ The media claimed they’d be there throughout the summer, with troops facing temperatures in excess of 50 degrees and the war dragging on indefinitely. The stock market duly dropped to just above the 3,000 level. As we now know, Baghdad fell to US forces on April 9th – and in hindsight ‘the day the tanks got stuck’ was a superb buying opportunity.
While the war on IS has been the headline news, less well reported – but of more significance to global stock markets – was a very downbeat assessment of the world economic outlook from the International Monetary Fund. The report was published at the beginning of October, with the IMF cutting its forecasts for global economic growth which, it warned, would be “weak and uneven.”
Chief IMF economist, Olivier Blanchard, warned that the recovery was becoming “more country specific.” This was good news for the UK, where the IMF remained positive, but there were sharp downgrades for Russia, the Middle East, Japan and the Eurozone.
Speaking to the BBC, George Osborne had warned that the UK economy was bound to be affected by the slowdown in Europe. “The UK,” he said, “is not immune to what is happening on the continent.” As we’ve reported in our regular monthly bulletins, there have been fears about the Eurozone stagnating for some time, and matters were made worse by German industrial output falling sharply in August (although this was partially explained by late school holidays which impacted on factory output).
Markets in the Far East have also been unnerved by the clashes over the planned elections in Hong Kong and the IMF’s warnings about the global economy – with the Japanese index falling by 1.4% on the day the IMF report was published.
One thing for certain with Stock market investments is that there will be times of uncertainty. The markets have no warning, and it is extremely difficult to consistently and successfully predict market movements.
Our investment strategies for our clients are based upon medium to long term investing, and we know that throughout the journey there will be short term falls.
We stick to the core principles of investing being asset allocation and diversification, and, crucially, strategies based upon an agreed assessment of risk to be taken by each client, which acknowledge that there will be market downturns at times.
History has shown us that sticking to these fundamentals, and holding to a long term strategy is key in times of volatility.
If you do have any questions, please, as always, contact your Cullen Wealth Consultant.
