Headline grabbing investments
Headline grabbing investments
Kate Rogers, Portfolio Director and Head of Policy at Cazenove Charities shares her thoughts on issues faced by the charity sector in Third Sector Magazine every other month.
It is always worrying to see a story about stock markets as front page news. If good news, it usually spells over exuberance and expensive markets. Sadly, it is bad news that more frequently hits the headlines and news reports usually contain the word 'crisis' or 'crash' provoking anxiety in investors across the land. It was, therefore, with a sense of deja vu that we woke up on Tuesday 25th August and saw the 'Black Monday' headlines describing the dramatic fall in Chinese shares (crash) that triggered a global sell off in equity markets (crisis). How should charity investors respond to these events?
First it is worth putting the equity market movements in context. Generally the falls in August wiped out the year to date gains. So although Chinese markets fell almost 40% from their peak in June, before that they had already gone up 60% in 2015 and ended August down just 2% for the year to date. Stock market corrections are a normal event and should be expected when investing in volatile assets such as equities. Arguably it is the lack of these corrections in the recent past that has been unusual.
Secondly it is worth considering what provoked the correction and whether that news significantly changes expectations for the future. So should we be concerned with what is happening in China? China is a command economy that is failing to respond to commands. The Chinese authorities know what they want to do - they want the economy to be less reliant on exports and generate more of its growth from domestic demand. Measures designed to stimulate demand have, to date, caused asset price bubbles to grow and burst; first in property and then in the equity market. Growth in China is certainly slowing, which has negative implications for commodity prices, and countries and companies that are reliant on Chinese economic health. However, for western developed economies that is likely to mean inflation is lower which, perversely, is good news for growth.
It may be considered ironic that while markets are becoming more anxious about declining growth in countries such as China, they seem to be equally stressed by the implications of gradually improving growth prospects in the West. In reality, gradual - and it will be gradual - increases in interest rates in the US and the UK ought to be viewed positively as they would signify that we are emerging from the shadow of the global recession and financial crisis at last.
Finally we need to think about whether we, as long term charity investors, should react. Is this a buying opportunity or a selling signal? Market corrections always prompt fears that there is something lurking in the shadows of the world economy that represents a significant, but to date unrecognised threat. Sometimes, fears are in line with economic reality. More often than not, fears are exaggerated. When this is the case, then the resulting movements in asset prices, and more reasonable valuations, provide charity investors with opportunities. We think that recent weakness is a potential opportunity. So bad news on the doorstep can be good news for long term investors seeking to take of advantage of market falls to buy into good quality companies at knock down prices.
A version of this article first appeared in Third Sector in September 2015. For this and other articles by Kate Rogers, visit thirdsector.co.uk
The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored.