Financial markets are once again making newspaper and TV headlines with the FTSE-100 index falling from highs of over 7,000 index points in April last year to levels which nearly touched 5,500 index points earlier this week. This sharp fall reflects greater uncertainties about the global economy which have impacted investor confidence.
Heightened equity market volatility is naturally a worry for all investors. However unlike the last period of sustained stock market falls between 2007 and early 2009 the UK economy is not currently anticipated to move into a recession. Earlier in February the International Monetary Fund confirmed that their expectation is for above 2% economic growth in both this year and 2017, a view reiterated last week by the Bank of England. Looking globally economic growth is anticipated in all other major developed countries around the world too. There are certainly imbalances in the global economy but currently they are much less extreme than back in 2007.
Part of the reason for this has been the experiences Central Banks, governments and private sector companies have all accumulated in the last eight or nine years. Additionally the Governor of the Bank of England believes that UK interest rates are highly unlikely to be increased over the next few months. These low interest rates support consumer spending and job creation.
We anticipate stock markets to start to stabilise globally as investors start to acknowledge some of these positives and realise that future opportunities still outweigh threats. The world’s growing consumer population provides a good medium-term underpinning for global growth and the high international orientation of UK businesses means they are well placed to benefit from this. Comments from many leading corporations in recent weeks support this view.
Finally most investors are likely to have a balance of asset classes represented in their portfolios. For example most bond markets have performed with relative solidity over recent weeks and this significantly dampens any volatility. Such diversification remains highly sensible for most investors.
In conclusion the day to day fluctuations of an uncertain stock market can cause huge concerns. History shows us that bouts of such volatility do occur. History also indicates that the key decision for investors during such times is not to panic but at least to retain the current diversified shape of their portfolios as periods of lowered returns are typically followed by periods of higher ones. Given the global economic backdrop outlined above we believe such a scenario is likely to play out once more.
This article is for information purposes only and should not be taken as advice.