The Chinese government’s recent decision to devalue the yuan, along with many other factors, including a multi-year price low in commodity markets, oil prices being down at an all-time low and the likelihood of Iranian oil coming back into the market, is being cited as a sign of impending global recession.
Is this the case, or simply that these price developments reflect a widespread condition of excess supply, rather than any general shortfall in demand?
The optimists within us might well say that rather than China’s position bringing impending doom and gloom to the market, opportunity is knocking.
If you already hold equities (shares, bonds, stakes etc.) then be prepared to see a downward turn in your portfolio this month.
China’s position has seen all markets worldwide follow a downward trend. But fear not and do not panic; for many this could prove to be a blessing in disguise. Withdrawing funds is not the answer.
Commodity producing countries such as Brazil are certainly suffering because of low prices but many other parts of the world are better off, seeing lower input costs in manufacturing.
Lower oil prices are also resulting in lower diesel and petrol prices, boosting disposable incomes for consumers. It is widely believed that the US will be the first major economy to raise interest rates with much commentary centered round September as the likely starting point.
However, the recent further fall in the oil price suggests that inflation levels will remain subdued for the foreseeable future. Nevertheless, even if rates were to rise next month, it is likely to be a token increase, with subsequent movements very slight indeed.
In the UK, inflation is also conspicuous by its absence and any moves seem unlikely until well into next year.
So what does all this mean for you? Share prices have suffered a very sharp correction in the last few weeks, albeit after many stock markets reached all-time highs in the spring.
Valuations are around the average for the last 20 years, so the current weakness offers a great entry point. Moreover, dividend yields remain well above government bond yields, underlining the income attractions of equities.
Low commodity prices are likely to keep the lid on inflationary pressures, removing the need to raise interest rates. This suggests that bond yields are likely to remain low for some time. Therefore, while stock markets may remain volatile over the coming months, investors shouldn’t be afraid of taking advantage of the recent dip in prices to add to positions where they can.
In layman’s terms, if you have cash in the bank with an expected low yield, and you are not in any rush to utilise the funds, then there has never been a better time to consider investing medium to long term in the equities markets, with products available that have potential to achieve returns in excess of bank interest rates.
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