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 bad news reports about the stock market often contain the words "crisis" or "crash", provoking anxiety in investors. It was with a sense of deja vu that we woke up on Tuesday 25 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 gains of the year to date. So although Chinese markets fell 40 per cent from the peak in June, before that they had already gone up by 60 per cent in 2015 and ended August down only 2 per cent for the year to date. Stock market corrections are normal events 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.
Second, it is worth considering what provoked the correction and whether that news significantly changes expectations for the future. So should we be concerned about 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 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 for countries and companies that are reliant on Chinese economic health. However, for developed economies in the west that is likely to mean inflation is lower – which, perversely, is good news for growth.
It might be considered ironic that, although 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 because 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 as yet unrecognised threat. Sometimes fears are in line with economic reality. More often, they are exaggerated. When this is the case, the resulting movements in asset prices, and more reasonable valuations, provide charity investors with opportunities. We think recent weakness is a potential opportunity.
So bad news on the doorstep can be good news for long-term investors seeking to take advantage of market falls to buy into good-quality companies at knock-down prices.
Kate Rogers is head of policy at Cazenove Charities