A&M Wealth Management | Crisis, What Crisis?
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Crisis, What Crisis?

Crisis, What Crisis?

Whilst global stock markets continued falling throughout January, one index, the VIX, rose by an impressive 10%. Unfortunately, investors cannot switch strategy and get on the VIX bandwagon, as the index, also known as the fear index, only measures the markets anxiety levels. Created by the Chicago Board Options Exchange, the VIX Index tracks how the market feels about the S&P 500 and likely future volatility. The higher the rating, the more nervous the market is about the S&P`s prospects.

The fall in global stock markets was triggered by the slowdown in China`s economic growth, falling Oil prices and rising US interest rates. UK investors also have the continuing problems within the EU and the forthcoming referendum to add to their anxiety.

My own personal VIX indicator began twitching quite abnormally around April 2015, when stock markets in both the US and UK reached their highest ever levels. Since then, global markets have fallen by approximately 20%, private investor anxiety levels have soared and my VIX indicator has returned to normal.

The strong performance of equity markets since the crash of 2008 had as much to do with investor momentum as economic recovery. I have commented many times on the unsustainable and unrealistic equity rally and the subsequent correction was only to be expected.

The level of fear that is now affecting markets may be as unrealistic as the optimism that prevailed during the rally.

The fall in global stock markets was triggered by the slowdown in China`s economic growth, falling Oil prices and rising US interest rates. UK investors also have the continuing problems within the EU and the forthcoming referendum to add to their anxiety.

Lets consider the factors that are causing concern:

1. China

The Chinese economy and therefore global demand for commodities has slowed as China tries to rebalance its economy. This is a sensible strategy and a move away from manufacturing in favour of a services and consumer led economy should help China to avoid the kind of stagnation that has afflicted Japan. Economic growth in China and the Asia Pacific region may stall temporarily, as adjustments are made, but the development will continue. The Chinese economy is still predicted to grow by an average of 6% per annum.

2. The Oil Price

Exporters and distributors of Oil will continue to suffer until production slows to meet the decreasing demand. The OPEC countries have refused to cut production levels in order to continue the price war with American energy producers. Whilst this has reaped some benefits, they will not be able to maintain this strategy for too long as the economic damage intensifies.

The flip side to this is the benefit of lower fuel and energy prices to the global economy. Economic growth usually improves between 12 and 18 months after a fall in Oil prices, as savings are passed on to consumers and businesses. Petrol prices have already fallen and the major energy providers have begun lowering prices. Consumers will feel the benefit and should have money to spend on other things.

The Chairman of Easyjet recently reported that although passenger numbers had fallen since the terrorist attacks in Paris, profits were up due to lower fuel costs!

3. US Interest Rates

The US Federal Reserve increased interest rates in December 2015 amid concerns about rising inflation. It now looks as though the Fed made a mistake, however, I don’t believe that an increase of 0.25% is going to have any serious impact. The value of the dollar has increased but it was already strong, given the improving US economy. The Fed is likely to put further increases on hold or may even reverse the December decision.

4. The EU and Brexit

The uncertainty about the EU and our future membership is increasing investor nervousness but will the result adversely affect the UK economy over the longer term? A vote to remain a member means that the status quo will be maintained and everything continues as normal. However, will a Brexit mean that we no longer trade on competitive terms with the EU? As one of the largest economies in the world, will BMW, Mercedes, Peugeot, Siemens and Bosch, to name but a few, be happy to stop exporting to us? Will the highly specialised and globally respected London financial markets no longer be important? I think not! Whatever the outcome of the referendum, global companies will continue to trade with and export to important markets and will ensure that their respective governments remain supportive.

The main reason that markets are falling is quite simple. They were too high to begin with. The global economic recovery is nowhere near complete and market indices were fuelled by investor momentum and not corporate profits and valuations. We continue to view the current volatility as an opportunity to invest and are acting accordingly.

The legendary investor Warren Buffett once said “I am fearful when others are greedy and greedy when others are fearful”. I doubt if his VIX Indicator has ever gotten out of control!