“The Great Fall of China” is the term used to describe the collapse in world stock markets on Monday 24th August 2015. The FTSE 100 and S & P 500 indices both fell by over 10% and the German DAX together with most Emerging Market indices all fell by 20% or more.
This is deep in correction territory and the falls were due to fears that China’s economic growth was running out of steam. The collapse of the China stock market was followed by a currency devaluation of 8% the following day. Market bears warned that China was heading for a hard landing and despite already significant declines in commodity funds and in Emerging Markets Funds; there was scope for further losses. It was suggested that the currency fall was the beginning of a currency war to weaken the yuan to assist Chinese exporters. Investors moved out of risky investments to the usual safe havens of Developed markets and German, UK and US bonds.
Economic forecasters were at pains to state that based on the global economic outlook, this fall represented a correction rather than a crash. Sentiment in the markets was described as “Fear, not Panic.” This seems to have been borne out by data from trading platforms for the following Monday, 31st August which shows that trading volumes were three times normal levels. The data confirms that the volatility was used by private investors to buy the biggest companies that fell most because they are overseas facing and most at risk to China. These purchases represented 42% of all transactions that day.
Since then, markets are very volatile with regular upward and downward movements in share and commodity prices.
Markets have changed focus to worry about the proposed US interest rate rise, flagged for later this month and the effects it will have on Emerging Markets in particular. There is concerted pressure on the Fed to delay this increase.
The advice to private investors is to think longer term and not to panic. Investors should consider diversifying their holdings and taking any action in stages.