Skip to main content
  • Register
  • Help
  • Contact us
  • Log out of your HL account

What's causing the current market slide?

Global stock market indices have been enduring a tough week, with the FTSE All-Share down 5.3% in the last five days.

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 market indices have been enduring a tough week, with the FTSE All-Share down 5.3% in the last five days.

The slide has been sparked by a combination of economic and political factors that have been around for a while but finally seem to have combined to spook investors.

Global trade tensions

Trade tensions between China and the US aren’t new. In fact they have probably been the hallmark of Donald Trump’s presidency. However, the US president has ratchetted up the pressure with last Friday’s threat of new tariffs on $300bn of Chinese imports.

The Chinese response has been to open up a new front, by allowing its currency, the renminbi, to sink below rmb7 to the dollar. That’s a level we haven’t seen since the financial crisis and raises the prospect of trade wars becoming currency wars.

By devaluing its currency China increases the competitiveness of Chinese exports. However, it’s also sparked worries we might see a race to the bottom – with other countries looking to devalue their currencies to stay competitive too.

All of this is bad news for trade, and ultimately the global economy. More fragmented markets are less efficient, making products more expensive, reducing corporate profits and reducing companies’ ability to pay dividends or reinvest for growth.

Weakening economic outlook

Perhaps partly because of the increasing trade tensions, the global economy is looking increasingly delicate. And weakness isn’t confined to the US and China. Fears that Germany could enter recession have been increasing, and the wider euro zone is also seeing growth slow.

That’s already finding its way through to company results.

We’ve seen a veritable flood of profit warnings in the last couple of months. While cyclical companies like airline Ryanair and car dealer Lookers have led the charge, we’ve also seen the combination of exceptional events and a weaker market dent performance from higher quality names like AG Barr and ASOS.

The overall feeling is that growth is increasingly hard to come by, which also explains the low bond yields we’re seeing at the moment. That’s a sentiment the US Federal Reserve seems to agree with, with markets pricing in a 95% chance of a rate cut by Christmas, as US central bankers look to rejuvenate the flagging economy.

Political deadlock in the UK

As well as a hostile macro environment, the UK has some specific political challenges ahead. That’s been a drag on the performance of domestic stocks for years, but the looming prospect of a no-deal Brexit has made matters worse.

There are two factors at work here.

The first is a worry among investors that a no-deal Brexit would damage the UK economy significantly by reducing consumer spending. If that happens, companies like housebuilders will suffer, potentially leading to further unemployment and exacerbating the downturn.

The second concern for international investors is that a no-deal Brexit hits the value of sterling, reducing the value of their UK investments. That’s led to a reluctance to invest in sterling denominated assets, even when earnings are generated overseas.

What does it all mean?

We always say investors should take a long-term view. And that’s as true when things are tough as when they’re going well, perhaps more so.

Despite the recent wobbles the FTSE All-Share is still up over 7% since the start of the year, and the long-term track record of stock market returns remains impressive.

For income investors able to stomach ups and downs in the value of their investment, the recent sell off actually improves the dividend available on the market. The FTSE 100 currently offers a yield of 5%, although that will vary to some degree as company profits rise and fall so isn’t a guide to future income and is not guaranteed.

For others with shorter time horizons or who are unwilling to see their investments fall in the short term, investments in bonds or cash savings may be more appropriate.

This article isn’t personal advice. If you’re not sure of the best course of action for your circumstances please take advice. Investments will rise and fall in value, so you could get back less than you invest.

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.

Daily market update emails

  • FTSE 100 riser and faller updates
  • Breaking market news, plus the latest share research, tips and broker comments
Register

Related articles

Category: Shares

Next week on the stock market

What to expect from a selection of the UK and international companies reporting next week. We look at the FTSE 100, FTSE 250 and Overseas shares publishing results next week starting 20 January 2020.

Sophie Lund-Yates, Equity Analyst

17 Jan 2020 min read

Category: Funds

Best and worst performing investment sectors in 2019

Technology or Targeted Absolute Return? USA or UK? Find out which areas of investment did best and worst in 2019.

Jonathon Curtis, Investment Analyst

13 Jan 2020 4 min read

Category: Shares

Next week on the stock market

What to expect from a selection of the UK and international companies reporting next week. We look at the FTSE 100, FTSE 250 and Overseas shares publishing results next week starting 13 January 2020.

Nicholas Hyett, Equity Analyst

10 Jan 2020 4 min read

Category: Shares

IPOs in 2020 – Don’t miss this year’s new launches

IPOs can offer exciting opportunities. It’s often the first chance to invest in a major, global brand. We take a look at Airbnb, ASDA, Palantir and Postmates who are rumoured to go public this year.

Nicholas Hyett, Equity Analyst

09 Jan 2020 5 min read