What next for global markets?
It’s fair to say that last week was a turbulent one for global stock markets. The International Monetary Fund (IMF) published a Financial Stability Report on Wednesday at its annual meeting in Indonesia, and the paper struck a less-than-optimistic tone. It cited the ‘dangerous undercurrents’ threatening the global economy – among them increased trade tensions, soaring global debt, rising American interest rates, the Italian banking crisis and risks of a disorderly Brexit. It came off the back of the body downgrading its forecasts for global growth in 2019 two days prior, thus painting a grim overall picture.
It also sparked an astonishing sell-off on global markets, with fears mounting that the remarkable bull run over the past two years – particularly in the US – is coming to an end, and that the bubble is set to burst. Wall Street suffered its biggest plunge in eight months, with the Dow Jones slumping by 3.15 per cent on Wednesday alone - with further declines over the remainder of the week – while the S&P 500 endured a six-day losing streak. Asian stock markets took a beating, while Europe was not immune either, with the FTSE closing 2 per cent down on Wednesday (having suffered a 1.3 per cent drop the day before). German and French indices dived to the tune of 1.3 per cent and 1.7 per cent respectively too.
Why are these threats a problem for global stock markets?
Markets were spared even more damage as a result of weaker-than-expected inflation data for the US, thus, in theory, giving the Federal Reserve food for thought before raising the key interest rate above its current level of 2.25 per cent. However, chairman Jay Powell has communicated to markets that another hike is likely this year, with a further three set to occur in 2019.
Rising interest rates in the States inevitably strengthen the dollar, and attract capital inflows as a result of higher returns. This double-edged sword has wreaked havoc within emerging economies - many of which have large stockpiles of debt. Obvious examples include Argentina and Turkey, who have seen their currencies depreciate rapidly, augmenting investor concerns that these countries will not be able to repay dollar-issued loans. It’s led to a sell-off in overseas stocks, with the IMF report predicting that capital outflows from emerging economies will be more than £76bn over the next 12 months. Many investors are taking refuge in safer US bonds – with the 10-year bond rate having climbed to more than 3 per cent.
Global debt (at a record high of nearly £140 trillion – 60 per cent higher than in 2008), the threat to the Eurozone as a result of disputes over Italian fiscal policy and Brexit uncertainty all serve to undermine global stability, which has also left investors running scared. But arguably the biggest headwind for stock markets is the trade dispute between the US and China, and the ripple effects these tensions are having across the board. The Chinese have previously demonstrated their willing to devalue their currency in a bid to use exports to solve their problems, and with fears of reciprocal tariffs being implemented on a broader scale growing by the day, stock markets are very much in the firing line if currency wars were to eventuate.
So, is it time to quit while you’re ahead?
Given the above cocktail of threats, the IMF has said that markets – where many major indices have remained in and around record highs over the past two years – have become ‘complacent’, hinting that a correction, or perhaps much worse, lies in wait. Certainly, no bull run can last forever, and US markets in particular, which hit dizzy heights in the wake of tax cuts, have been on the rampage. But it is still important to put last week’s turmoil into context.
Take the FTSE 100, which suffered a 2 per cent drop-off in a single day. That’s undoubtedly a battering. But historically, it is nowhere near the worst of it in terms of volatility. The infamous Black Monday crash, for example, saw two consecutive days of the Footsie plummeting by over 10 per cent. It took the market nearly two years to restore those lost gains. In fact, since the index launched in 1984, there have been at least 84 trading days whereby falls have exceeded 3 per cent, while there have been 18 days when losses have hit 5 per cent or more.
Cool heads need to prevail
So, while last week’s turmoil has rightly spooked investors, and the issues highlighted by the IMF do pose real threats, it’s important that media headlines such as ‘bloodbath’ and ‘meltdown’ don’t skew one’s perspective when addressing the state of markets at present. The age-old principle with stock market investment still applies: those who are most successful are those who invest for the long-term, rather than those who speculate over when to catch a falling knife. Indeed, global stock markets in first-world nations, as measured by the MSCI World index, have provided average annual returns of 7.2 per cent over the past 30 years according to Schroders (assuming dividend income is reinvested).
That’s in no way implying that exposing one’s portfolio disproportionately to such asset classes is the sensible way to go. On the contrary, diversification is key to ensuring portfolio growth, which reinforces the likes of peer-to-peer lending as an attractive investment choice. At a time when the storm clouds are gathering (and while interest rates on savings remain in the gutter), the stable, inflation-beating returns offered by P2P are hard to argue with.
Nevertheless, panic can, in itself, result in a self-fulfilling prophecy when it comes to stock markets. The worst may be still to come – not least if the aforementioned threats are not dealt with. But, rather than getting carried away with bad omens, it is vital that individuals, fund managers, businesses and institutional investors keep their heads. Stocks go up and down. They always have, and they always will. It is with this in mind that we should avoid mistaking a natural, cyclical correction for a full-blown crisis.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?