Financial advisers and other financial industry professionals around the world have been helping clients deal with the shock of their paper losses over the last few days, as major stock markets in Hong Kong, China, Singapore and Australia on Tuesday followed the lead of the US markets on Monday and closed significantly lower than they opened.
This came after the Dow Jones Industrial Average tumbled nearly 1,600 points at one point on Monday, eventually closing at 24,345, or down 1,175 points, or 4.6%. It was the largest intra-day point drop for the Dow in history, and its biggest recorded fall in terms of points.The S&P 500 index also fell sharply, ending Monday 4.1% lower.
On Tuesday, Hong Kong’s Hang Seng Index plummeted by 1,649.80 points, or 5.1%, closing at 30,959.42, the exchange’s biggest point drop since July 8, 2015, when there was a significant downturn on the mainland Chinese stock market.
Declines were recorded on every other Asian stock market index on Tuesday as well, index except the Laos Composite, which, according to one report, actually inched up by 0.6%. In Australia, the Australian Securities Exchange suffered its biggest one-day fall in more than two years, with shares tumbling 3.3%.
All of this came in the wake of the DJIA’s fall of 665 points on Friday.
A measure of the concern that investors have been feeling was highlighted in a Bloomberg website article on Monday that reported the websites of two of America’s largest robo-advisers – Wealthfront Inc. and Betterment LLC – “crashed as the S&P 500 Index sank 4.1%”.
The trigger to the global sell-off appeared to be investor that a long-running era of cheap money is coming to an end, in the face of inflationary pressures. Nevertheless, advisers told International Investment this morning, the fact that the fundamentals in many markets have been relatively strong and stable in recent months has made it easier to reassure clients that the stock market falls may be seen as normal volatility, rather than a cause to panic or sell.
“The key is to remain invested[and] focus on your long-term investment objectives while diversifying your risk – both globally and across asset classes,” said Sam Instone, founder and chief executive of Dubai-based AES International, expressing a view echoed by other advisory experts.
“And ultimately, remember investment is not speculation.”
At 3D Global, an advisory firm based in Cyprus, chief operating officer Tony Pentland says the general sense among advisers, and what they’re telling their clients, is that “we have been due for a market correction, probably in the form of profit-taking, and some bad figures from American companies, which usually start a run”.
“Our advice has always been that a paper loss will only translate into a real loss if the client decides to sell the investment,” he adds.
“Our clients are mainly invested into well diversified portfolios, and although not immune to loss, most see their paper losses regain their ground in the coming months.”
‘Not been driven by anything fundamental’
At Atlas Wealth Management, a Gold Coast, Australia-based firm which looks after expatriate Australians around the world, managing director Brett Evans, pictured left, took the decision to send his firm’s clients – many of whom live in very different time zones, which can make telephone and face-to-face communications difficult – an emailed explanation of his take on events, “and what we see playing out over the coming days, weeks and months”.
In an email late Tuesday evening Australia time, Evans told International Investment that for his clients, given the recent strength of the Australian dollar, “a rise in US rates is actually something we would welcome”, since it would cause the Aussie dollar to weaken – and that this is one of the points he was hoping to convey to them.
“The resulting fall in the Australian dollar, combined with the boost that Australian companies that earn foreign currency or export overseas will receive [from a rise in US rates], will benefit stocks in our portfolios.
“As the majority of our clients earn their salary in US dollars or US dollar-linked/pegged currencies, they are happy with the weakening Australian dollar.”
Evans began his email to his clients by pointing out that the recent fall in the US market, which sparked the subsequent falls elsewhere, hadn’t been driven by anything fundamental.
“By that we mean there has been no particular piece of news or company/market event which has caused the selling to occur.
“So what has caused the selloff? Fear has been brewing over a number of issues with the largest one being the possibility of the US Federal Reserve increasing interest rates. This fear has been driven by the strength in the US economy which has recently received a kick along thanks to the Trump administrations tax cuts, but the interesting point is that the bond yields for the 10 Year US Government Bond (one of the best indicators of a change in interest rates) has actually fallen over the last two days.” (Evans then illustrates this point with a chart, one of several in his email.)
He ends his email by saying, “We are currently reviewing the portfolios to ensure that if we do see an increase in interest rates (and a subsequent fall in the AUD) that we’re not holding any companies that may suffer as a result. Should we identify any of these companies over the coming weeks, we will be in touch with our recommendation.
“While we may continue to see headlines like .Dow fall largest in six years’, you need to remember that when an index is at 26,000, and it falls by over 1,500 points, that is very different to when an index is at 10,000 points and it falls by 1,500 points.”
‘Storm in a tea cup’
At the deVere Group, company investment strategist Tom Elliott has also urged calm, likening the global market sell-off of the last few days to “a storm in a tea cup”.
“We will probably see a recovery rally within the week, and by next Monday analysts will be referring to this as having been a ‘much needed correction as part of an ongoing rally’,” Elliott added, in a prepared statement.
“Financial history is full of false warnings of imminent bear markets – but right now we miss any key component, with no imminent recession in a major economy, no financial crisis, no one particular over-extended sector of the economy or stock market.”
Elliott, too, urged investors to “remain in the market and with a properly diversified portfolio, to take advantage of the opportunities and help mitigate the potential risks”.
“Inflation does not appear a realistic threat at current levels, and the Fed is unlikely to alter its cautious approach to monetary tightening.”