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Point of View Archive

Why investors’ eyes are fixed on China

This week the attention of investors has been firmly fixed on China. The Chinese Central Bank pushed through a number of policy decisions which un-nerved investor confidence and triggered China’s equity markets to fall. Chinese officials then chose to adjust the way they manage their currency link to the US dollar (USD). By setting the exchange rate band with reference to the previous days close, they were in essence sanctioning a weaker currency.  There was some belief this was to counter balance the sudden fall of the Shanghai Stock Exchange, but many experts also view the action as another small step in a move to a more flexible exchange rate. This is something the International Monetary Fund (IMF) is looking for before accepting the Chinese renminbi (the yuan) as a component of its currency basket, currently restricted to the USD, euro, Japanese yen and pound sterling. Global investors reacted with concern and stocks markets around the world started to fall. China is the world’s second largest economy and any indication of a slowdown has consequences for not just Asia but the rest of the world.

Despite concern that China could trigger another ‘2008’ financial crash, many experienced fund managers do not believe we are on the verge of crisis. Many had voiced concerns about China many months ago and re-positioned their portfolios accordingly. The close link between the yuan and the USD had been causing Chinese exporters increasing difficulties as the USD has rallied against key peers such as the euro, the yen and the pound. The small 4% or 5% adjustment does only a little to relieve the pressure, so the FTSE 100, and other major markets remain choppy.

What we are experiencing is a sharp reminder that investing in stock markets can be volatile, and that to experience the highs, you have to also be prepared to cope with the lows.

There has always been a direct connection between human emotion and investing. This means that when the world is ill at ease, behaviour towards how we manage our money can change.

Whilst it is sensible to make investment decisions based on research and tolerance to taking risk, inevitably there is an element of human instinct and emotion which can interfere. Money provides us with physical and emotional security and when there is a risk to losing that protection, human instinct can cause us to react in an illogical way.

When bad news hits the headlines, the stock market can often react negatively, but as calm is restored, it typically recovers. It is at these times that we should trust the experience of fund managers to be holding a diverse range of investment funds to manage the rise and fall of stock markets, known as volatility. Those who choose cautious investment funds may experience smaller highs and lows in their investment value, compared to those who choose very risky investments in order to seek greater returns, and will likely see greater lows.

In fact in times of volatility, professional investors can reap rewards for their clients buying stocks when prices drop and selling when they are high. Indeed, by trusting managers who commit our capital to good businesses, to share in the rewards, it optimises returns by ensuring those managers can deploy that capital when more attractive buying opportunities appear.

When investing, it is important to understand your own tolerance to taking investment risk and using this as your guide when making decision. This approach means that when the newspaper headlines are not positive, you don’t allow your instincts to take over your wealth planning.

How to better manage investment risk:

  1. If you are not an experienced and knowledgeable investor, then don’t try and make decisions yourself. A good Wealth Planner will help you to define a level of risk that you are comfortable with and that matches your needs; they will use this as the basis to make recommendations.
  2. Avoid being drawn in by the hype. Whether it is the latest favoured country to invest in, the headline grabbing fund manager or a deal which promises great returns, tune out of the conversation. Decisions regarding how you invest should only fit alongside your existing plans and risk profile; ‘wild card’ investing is unlikely to help you reach your long-term financial goals.
  3. Don’t make knee jerk investment decisions. There have been many reasons why the stock market has both risen and fallen over the years. If you see your investments fall, speak to your Wealth Planner before acting, as long term investments are expected to fluctuate in value. Don’t forget, volatility can be a good thing when investing.
  4. Whatever your approach is to taking investment risk, use your ISA allowance each year. This tax year (2015/6) you can put up to £15,240 into an ISA and any income (or gain made) is paid tax-free.
  5. If you have large sums of money held in cash talk to your Wealth Planner about reviewing the interest being paid on this account. It may be that inflation (the rise in the cost of living) is outstripping any interest being paid and eroding the value of your savings in real terms. There may be low risk alternative investment solutions which you can consider for part of your cash savings and may provide you greater returns.

To speak to a Wealth Planner at Sanlam or to find out more about Sanlam’s approach to risk based investments get in touch, we’d love to help. 

Date issued: 03.09.15

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependant upon individual client circumstances and may be subject to change.

Sanlam is a trading name of Sanlam Wealth Planning UK Limited (Reg. in England 3879955) and English Mutual Limited (Reg. in England 6685913). English Mutual Limited is an appointed representative of Sanlam Wealth Planning UK Limited which is authorised and regulated by the Financial Conduct Authority.

Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.