Inclement holiday season weather provided an appropriate backdrop to turbulent markets in August. A rout in Chinese shares gathered pace, and fears that China's economy is slowing dramatically sparked heavy selling in markets around the globe, culminating in a Chinese “Black Monday” on 24 August 2015.
Beijing's unexpected move to devalue its currency initially raised the alarm, then weak economic data added to worries that the world's second-largest economy may be in worse shape than investors previously thought and could cause a global slowdown. The impact spread far beyond emerging markets and commodities as investors reappraised the effect a slowing China might have on the rest of the world’s economies.
Deflation fears were back in the frame and bond yields fell (and bond prices rose) as expectations diminished concerning the timing and extent of interest rate hikes in the UK and US. Many of the bond sectors therefore fared relatively well during the month with the funds of the IA* UK Gilts sector leading the way. There was also a particularly strong showing from European corporate bond funds.
Unsurprisingly, the weakest sector during August was IA Greater China, falling 10.1%. The Shanghai Stock Exchange Composite index fell into negative territory for 2015, having risen as much as 60% from the beginning of the year to its June 2015 peak. Wider Asian funds also had poor returns with the IA Asia Excluding Japan sector falling 8.0%. With the oil price falling to levels last seen in early 2009 (albeit rebounding strongly in the last few days of August) and other commodities tumbling, energy and mining funds were badly hit as well. Other emerging markets also struggled, notably Latin America, which depends heavily on commodity exports.
US and European equity markets sustained heavy losses, though there was a bounce at the month end with economic growth figures from the US unexpectedly strong. The IA North America sector fell 4.4% and the IA Europe Excluding UK sector 4.0%. Within the IA UK All Companies sector it was interesting to observe that tracker funds – i.e. those that simply aim to follow the FTSE 100 or FTSE All Share indices – were among the worst performers. This was because several of the market’s largest constituents such as Shell, BP and HSBC had a particularly difficult time. For the energy firms the cause was the tumbling oil price, and HSBC suffered due to its exposure to Asia.
As for the brighter areas, besides government bonds, some funds in the IA Targeted Absolute Return sector fared well, as did gold funds which escaped the wider commodity woes as the precious metal was seen as a relative safe haven in the turmoil.
As always – if you are seeking Independent Advice as to where to invest or to review your existing investments – we are here to help.