The Crouching Tiger – Chinese equity markets seesaw & add to global market volatility.
The last few weeks have seen an extraordinary level of instability and volatility in global financial markets – especially in equities and some emerging market (EM) currencies.
In this blog, Scott Millson highlights why this has happened, what to expect moving forward and what it means to your investments.
Key factors behind the market volatility
Much of what has taken place in global financial markets in recent days/weeks has been driven by fresh concerns over the pace of growth in China and further volatility on Chinese equity markets.
Chinese policy makers appear to be prioritising the slowing economy and stabilising the currency over protecting the equity market – as a result of the apparent lack of immediate policy action on the latter, the Chinese equity market continues to fall sharply and this has led to falls in global equity markets. There have been no other signs of a broader global economic slowdown.
Expect further policy easing in China
While there is evidence of a slowdown in the Chinese economy, the Chinese authorities still have plenty of room to ease policy.
Late Tuesday, China’s central bank cut interest rates and flooded the banking system with liquidity via a cut to banks’ reserve ratio requirements.
Further interest rate cuts, reductions in the Reserve Requirement Ratio (which would allow the banks to lend more money) and further currency depreciation are a possibility.
What to expect going forward
There is evidence that the recovery in the West is becoming more entrenched. The desire to raise the cost of money, in a world that for the moment is awash with cheap energy and commodities, may be reduced.
So the fear in the markets relates to a poorer growth outlook for the world in general and a subsequent downward repricing of shares worldwide.
As we have just witnessed, risk gets repriced exceedingly swiftly. The question is then whether markets have now reached a level where the prospect of slow growth, and associated weak prices in commodities (oil, metals and agricultural produce), is fairly discounted in share prices.
Over the short term we must be prepared for continued volatility in equity markets as China equity markets continue to digest economic information and Chinese authorities implement further policies.
Adding to global market volatility, is the timing of the potential US interest rate hike not yet introduced by the US Federal Reserve (the Fed) but expected as early as September this year.
What does the market volatility mean for your investments?
For accumulators: It’s time in the market, not timing the market, that’s important! So if you can ride out the volatile times, you could have a smoother return over the long term. Diversifying your investments can help to defend against volatility and reduce risks.
It’s also important to manage your expectations. A slower global economic growth rate means a period of lower returns on traditional asset classes. Returns in the decade leading up to the recent Global Financial Crisis were abnormally high, so it’s important you don’t use these returns as the norm.
Be aware of your own tolerance to risk and talk to your HTA Wealth adviser to see what action best suits your investment plan.
Pre- and post-retiree – If you’re in retirement or nearing retirement, it’s an understandable reaction to want to protect your investments. After all, your investment returns play a vital role in funding your retirement. In times of volatility it’s easy to react emotionally. But now is the time to keep a level head and stick to your long term investment strategy. Trying to time the markets and responding to every market movement could leave you considerably worse off. It’s a good time to speak to your HTA Wealth adviser and remind yourself that markets do recover. Don’t let short-term volatility get in the way of your longer-term needs.
If you would like to discuss your wealth accumulation strategy and how your investments should be positioned in light of the current global markets, please arrange a meeting with our HTA Wealth Adviser, Scott Millson by contacting HTA Advisory.
This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. HTA Wealth Services are provided by Scott Millson, Authorised Representative of Australian Unity Personal Financial Services Ltd AFSL: 234459