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Our monthly research roundup – the bear bites back?

Kate Marshall, Senior Investment Analyst, looks at what our investment team got up to in October.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Global stock markets took a tumble last month and got investors’ hearts racing.

It’s not the first time October has seen some big setbacks. The Great Crash of 1929 and Black Monday in 1987 are two of the most well-known examples. Markets haven’t fallen anywhere as far in 2018, but it’s still caused some tension.

Some market commentators think the falls are just a market correction (widely seen as a loss of at least 10%), rather than a bear market (losses of more than 20%). Further falls aren’t out of the question though, seeing as markets have performed so well for much of the past decade.

Why now?

The slump could be pinned down to several reasons.

Worries about a US-China trade war is probably the most obvious. Slowing growth in China and Brexit uncertainty hasn’t helped either.

And these issues are coming together just as quantitative easing (QE), which helped push up share and bond prices, is ending. The US has already ended its own programme. Quantitative tightening, where money is withdrawn from the financial system, is now on the scene. The European Central Bank has also taken its foot off the accelerator by reducing the amount of QE it does each month.

The era of ultra-low interest rates is also coming to an end. If savers can get a better deal on their cash savings they might start to take some of their money out of the market, where savings aren’t guaranteed.

But rising interest rates makes it more expensive for people to pay off their debts, like mortgages. So we think rate rises will be gradual over the coming years. If they rise too quickly it could put the brakes on any economic recovery.

Markets aren’t one and the same

There’s been some big differences in the way markets have performed though. Last month China’s stock market fell 11.4%, but Brazil’s was up 9.5% (in terms of their local currencies).

China’s been hurt by some of the reasons outlined above, while Brazil got a boost after the election of far-right leader Jair Bolsonaro as President. Investors are positive about some of his plans for economic reform and a tough stance on corruption.

What does this mean for investors?

At the end of the day stock markets are meant to fluctuate. Lots of investors overreact to volatility. If you’re one of the few that can hold their nerve, the better off you’re likely to be.

This is because stock markets can bounce back from setbacks. The most successful companies will continue to make profits and reward their shareholders through dividends. And that’s what investment is all about – sharing in the long-term success of companies.

There’s no right way to invest. But there’s a few simple things we think investors need to remember.

Diversify your portfolio by having a good spread of investments. This can help smooth out returns over the long run. And don’t forget to rebalance – this means taking profits from stronger-performing investments and adding to ones that haven’t done as well, as long as you still have long-term conviction. It’s also wise to keep some cash on hand to take advantage of lower prices when stock markets are weak.

Our analysis suggests the Chinese stock market is now one of the most attractively valued. Essentially this means shares can be bought at a lower price than any potential future earnings growth of the underlying company suggests.

It could be time to dip a toe in the water, if you can take a long-term outlook. A broader Asian or emerging markets fund could be an option to help maintain diversification. JPMorgan Emerging Markets, for example, invests almost 40% in China at the moment. It also invests in other markets like India, Brazil and Mexico.

Or the First State Asia Focus fund focuses specifically on Asia Pacific markets. Around 28% is currently invested in China and Hong Kong, and it has tended to hold up a little better than other Asian funds when markets were weaker. Past performance isn’t a guide to future returns though and we could still see more volatility, especially as emerging markets are higher-risk than developed ones.

Looking more broadly across the globe, some of the higher-growth areas of the market, like technology, haven’t done so well recently. Some of the previously unloved areas have done better. It’s a reminder that different investment styles will do well at different times. A fund such as Jupiter Global Value Equity does something a bit different – the managers look for companies that have been out of favour and can be bought at a low share price, but have the potential to bounce back.

It can also pay to have some exposure to more conservative funds that aim to provide some shelter when markets fall, but also offer some potential for long-term growth. One of our favourites is Pyrford Global Total Return. It mainly invests in government bonds, the shares of larger companies, and cash, and could be a useful addition for when markets hit tougher times.

This article isn’t personal advice. All investments can fall in value as well as rise so you could get back less than you invest. If you’re not sure if an investment is right for you, please seek advice.   

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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