History tells investors to keep their nerve when headlines scream 'crisis'

Swim against the tide: a country in the midst of a financial crisis, like Greece, may offer investment opportunities

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The Independent Online

The Chinese stock market has endured further falls this week as worried investors continue to sell despite the authorities’ attempts to stabilise the market. Meanwhile, when Greece reopened its stock market on Monday, the falls were dramatic, with the main Athens stock index, the Athex, dropping 23 per cent in early trading.

Recent global economic headlines have been alarming, with Greece almost going bust and China's stock market collapsing. But how do they affect your finances? Tom Stevenson, investment director at Fidelity Worldwide Investments, said it's good to be aware of what's going on in the world but, for investors, it's more important to be conscious of the long-term themes in national economies around the world.

"For instance, the long-term story in China is very positive," he said. "The economy is growing much faster than in many developed countries."

So the recent stock market slump is a passing issue, not linked to the underlying growth of the economy, he explained – which will leave investors who keep the faith with a tidy profit and still looking at plenty of potential for future growth.

"You have to stand back from the short-term noise and decide where you want to be invested," he advised. "More importantly, you should ensure your portfolio is diversified so you don't end up taking a major hit from just one problem."

Mouhammed Choukeir, chief investment officer at Kleinwort Benson, agrees. He said: "It's easy to assume that investors should be defensive during times of heightened conflict or stress. However, we've found that geopolitics rarely impact equity markets over the medium to long term. The data does not support the hypothesis that geopolitical tensions are bad for markets."

His company has analysed 16 geopolitical crises since 1950 and reports that in only four of them was the American S&P 500 market index down one month later. And on those occasions where the market did turn down, the factors were not necessarily political. After 9/11, for example, equity markets lost value, but that's likely to have been linked to the boom and bust of the tech sector.

Looking back even further, to when the world was said to have held its breath during the Cuban missile crisis in October 1962, an investor in the S&P 500 would actually have been up 7 per cent in the following month, 16 per cent in the next quarter and up 34 per cent a year later.

Similarly the invasion of Iraq in March 2003 marked he beginning of strong returns for investors. The S&P rocketed 35 per cent in the 12 months following the invasion.

"Geopolitical tensions may create jitters in markets in the short run, but their impact on medium- and long-term performance is likely to be minimal," said Mr Choukeir.

It's all about managing the risk, according to Mr Stevenson, in a new video interview with The Independent. Experienced investors will have managed their exposure to Greece, for instance, long before the recent problems there.

"We should use the news headlines to our advantage," Mr Stevenson concludes. "The Greece news, for instance, is likely to be good for the European Union over the longer term, so investors may want to adjust their portfolios in line with that potential."

To watch the interview with Mr Stevenson go online to ind.pn/1KCOIIP.

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