Even if you usually have little interest in following the stock markets you won’t have missed the daily media storm over the devaluation of China’s currency and the knock-on effect on other worldwide share prices.
At times like this we do well to remember the age-old principle of long-term investing: it’s often the ones who ride out the storm and look for the opportunities who ultimately reap the benefits.
Here are the answers to four key questions to help you make sense of the situation.
WHAT STARTED ALL OF THIS?
Over the past few months there have been signs that China’s economic growth was starting to slow down. China is the world’s second largest economy and with share prices falling and headlines growing the unease spread to other world markets.
Investor concerns were made worse by weakness in the price of natural resources like oil and industrial metals. The level of demand for these goods, which helps drive prices up and down, is seen by investors as a gauge of the health of the world economy.
Last but not least comes talk of a possible rise in US interest rates. By raising the cost of borrowing money, the US central bank would make things like repaying mortgages and taking out company loans for investment more expensive.
WHAT DOES IT ALL MEAN?
Events like these tend to start something of a chain reaction, and the result is that we have seen large moves in company share prices worldwide. This in turn has a tendency to make some investors feel unsettled and possibly make knee-jerk decisions, leading to greater than usual fluctuations in share prices.
IT’S IMPORTANT TO SEE THESE PRICE FLUCTUATIONS IN CONTEXT.
There are a number of reasons not to panic, and perhaps even to see opportunities.
While the lower value of raw materials such as oil may be bad news for some countries that produce them, they are in fact a boost to the nations, including most of the developed world, who are net importers. By giving consumers and businesses more money to spend and invest, these price declines should actually help boost economic growth.
• US interest rate rises
The odds of the US central bank raising interest rates in September – and possibly even this year at all – have now receded as the US is very sensitive to the levels of share prices; plus the rate of inflation in consumer prices is slowing, according to Christine Johnson, head of fixed income at Old Mutual Global Investors (OMGI).
• Large changes in share prices
The sharp nature of the moves suggests that there may not actually have been that many investors behind them. This could be because they happened at the height of the summer, a period when many traders are typically away from their desks.
SO WHY SHOULD I STAY INVESTED?
Richard Buxton, Head of UK Equities at OMGI and manager of the Old Mutual UK Alpha Fund, says that declines in share prices have made the trade-off between the potential risks and rewards of investing more appealing. This means the scope for further bad news to hurt shares may be less than that for positive surprises to lift them up.
He suggests that investors can benefit by not acting rashly and riding out market turbulence. The upturns can be as sharp.